Neglected stocks — I measure it by the ratio of market cap to average dollar volume. 15% of my portfolio is allocated to such stocks, but I would be happy for it to be 50%, if not more. Many of my companies have a single large holder or group — Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA), National Western Life Insurance Company (NYSE:NWLI), CVR Energy, Inc. (NYSE:CVI), and Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B). These companies have few analysts; there is no way for a brokerage to make money off of them.
Yes, there is a control discount for such companies, because they can’t be taken over, except by the dominant owner. But if they are well-run, they can be great places to invest. The dominant investor has his interests aligned with yours over the long haul. This means that in good and bad times, a large amount of the stock is locked up, and is not available to be bought or sold. Strong hands hold the stock, which is typically a good place to be.
I like holding cheap, illiquid companies, where there is no hint of financial stress, and they are earning decent money. I don’t care if they are in dull industries. If they are compounding their earnings at a decent clip, the stock will eventually catch up.
The point is to own good businesses at good prices. That’s what I aim to do.
Full disclosure: long BRK/B, CVI, IBA & NWLI
By David Merkel, CFA of Aleph Blog