Avoiding Admired Companies
At the beginning of 2013, Amazon.com emerged as the company with the best reputation among the general U.S. public, according to a Harris Interactive survey of 14,000 randomly selected individuals. Also included in the list were Apple, Disney, and Google. Great companies tend to be overvalued; an extreme example of this is Amazon, which was trading for well over a 200 P/E in late 2012 and had a negative P/E by March 2013 (-9 cents per share). At the same time Amazon was trading at a negative P/E, Apple—another highly admired company—had a < 10 P/E ratio.
A 2010 study in The Journal of Portfolio Management looked at Fortune magazine’s annual list of most admired companies from 1983 to 2007. The least admired companies outperformed the most admired by two full percentage points a year. According to the Harris survey, companies with the worst reputations in early 2013 included: AIG, Goldman Sachs, AMR, and Halliburton.
Several years ago, another study in The Journal of Portfolio Management looked at companies that were the subject of magazine cover stories; the article was titled “Are Cover Stories Effective Contrarian Indicators?” The study concentrated on company-specific cover stories between 1983 and 2002 in BusinessWeek, Forbes, and Fortune. The study found the cover story typically occurred after the end of the company’s stock beating the stock market and that, thereafter, its stock tended to lag behind. The study also found a negative cover story “generally indicated the end of poor performance.”
Published 60 years ago, The Art of Contrary Thinking pointed out: “When everyone thinks alike, everyone is likely to be wrong.” The book’s author, Humphrey Neill, is widely considered the father of contrarian investing.