Scalper1 News
Summary In our ongoing efforts to point out the value of buying the least expensive stock, we have reviewed the price performance of the Class I railroads over fifteen years. We found that the most expensive stock outperforms about 50% of the time. The more relevant finding, though, is the powerful relative performance of the “cheap group” versus the “expensive group.” We offer this (non-scientific) study as the basis for discussion. We thought we’d take a break from talking about operating yields, the value of avoiding optimism and the fact that most expensive stocks disappoint over time to talk about the value of cheap investing as it relates to railroad investing. Although this short study was in the aid of our railroad obsession, we believe the findings are relevant to many sectors and stocks. We decided to review the price performance of the six Class I railroads for which we have data available for the period 2000-2014. We looked at which company was the least and most expensive on a PE basis at the beginning of each year from 2000 to 2014 inclusive. We then calculated the subsequent yearly returns for the cheapest and the most expensive railroads. The results are interesting (to us, anyway….we know…get a hobby). Results We found that “buying expensive” in some sense beat “buying cheap.” Specifically, buying the most expensive railroad at the beginning of the year was as likely as not to generate higher returns than the cheapest railroad over that year. Before concluding that there’s no value in buying cheap, though, consider that the mean return for cheap was much greater than buying expensive. Over the past fifteen years, on average, buying the cheapest railroad has produced a return of 23.56%, while the return for buying the most expensive railroad generated only an 18.25% return on average. We include the raw data at the end of this document. Source: Gurufocus Although buying expensive may beat buying cheap in any given year, over time, buying cheap has crushed the returns of the positive railroads. In our view, there was less risk associated with these cheaper stock returns also. We acknowledge that this is not a scientifically sound study. We will expand the study to include total returns from dividends. In future, we’ll review the tax consequences of this approach relative to a buy and hold approach. We will compare these returns to a benchmark (perhaps the transportation index). Before that, though, we believe that something need not be scientifically robust to be true. Although we’ll refine the work, this is sufficient evidence that buying cheaper railroads produces higher returns at lower risk than the alternative. Conclusion Although this short study looked only at the Class I railroads, we believe there’s a wider lesson here. Although expensively priced stocks may outperform in a given year, they will perform less well over time. Given that they’re coming from a much less expensive base, cheaper stocks almost inevitably outperform over time. (click to enlarge) Source: Gurufocus Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
Scalper1 News