Investment strategy: Contrarian investing can win big time

Jeremy Siegel is a professor of finance at the Wharton School of the University of Pennsylvania and author of the book Stocks for the Long Run. Professor Siegel points out that the best long term investment strategy often involves buying stocks that other investors hate. This leads The Investment Reporter to ponder: Is ‘big oil’ the new ‘big tobacco’?

Professor Siegel examined the stocks of the original Standard & Poor’s 500-stock Index—or S&P 500 Index. He writes, “By far the best-performing stock is Philip Morris, which in 2003 changed its name to Altria Group and in 2008 spun off its international division (Philip Morris International). Philip Morris introduced the world to the Marlborough Man, one of the world’s most recognized icons, two years before the formulation of the S&P 500 Index. Marlboro cigarettes subsequently became the world’s best-selling brand and propelled Philip Morris stock upward.

Buy and hold strategy turns $1,000 to $1 billion!

“The average annual return on Philip Morris over the past half century, at 19.47 percent per year, almost doubled the 10.07 percent annual return on the S&P 500 Index. This return means that $1,000 invested in Philip Morris on March 1, 1957, would have accumulated to almost $20 million by the end of 2012, more than 100 times the $191,000 accumulation in the S&P 500 Index.

“Philip Morris’s outstanding performance does not just date from midcentury. Philip Morris was also the best-performing stock since 1925, the date when comprehensive returns on individual stocks were first compiled. From the end of 1925 through the end of 2012, Philip Morris delivered a 17.3 percent compound annual return, 7.7 percent greater than the market indexes. Had your grandmother bought 40 shares (cost of $1,000) of Philip Morris in 1925 and joined its dividend investment plan, her shares would have been worth over $1 billion dollars by the end of 2012!

‘Bad news is good news’ as strategic investment advice

“Some readers may be surprised that Philip Morris is the top performer for investors in the face of the onslaught of governmental restrictions and legal actions that have cost the firm tens of billions of dollars and at one time threatened the cigarette manufacturer with bankruptcy.

“But in the capital markets, bad news for the firm often can be good news for investors who hold onto the stock and reinvest their dividends. If investors become overly-pessimistic about the prospects for a stock, the low price enables stockholders who reinvest their dividends to buy the company on the cheap. These reinvested dividends have turned its stock into a pile of gold for those who stuck with Philip Morris.”

Original S&P 500 outperform updated index

Professor Siegel continues: “One of the most remarkable aspects of these original 500 firms is that the investor who purchased the original portfolio of 500 stocks and never bought any of the more than 1,000 additional firms that have been added by Standard & Poor’s in the subsequent 50 years would have outperformed the dynamic updated index. The return of the original 500 firms is more than 1 percentage point higher than the updated index’s 10.07 percent annual return.

“Although the earnings and sales of many of the new firms grew faster than those of the older firms, the price that investors paid for these stocks was simply too high to generate good returns.

“Stocks that qualify for entry into the S&P 500 Index must have sufficient market value to be among the 500 largest firms. But a market value this high is often reached because of unwarranted optimism on the part of investors.”

Is ‘big oil’ the new ‘big tobacco’?

Many investors hate and refuse to buy Altria Group (formerly Philip Morris). Some have lost loved ones to lung cancer, strokes or emphysema caused by smoking. They themselves may be sick from smoking. One investor we spoke to said he wouldn’t buy Altria because he didn’t want his children to smoke. Smoking was once seen as ‘cool’. Now it’s seen as very ‘uncool’. Another investor we spoke to said that only ‘losers’ smoke. After his smoking wife died of lung cancer, he said that he would never marry a woman who smokes.

These days, many people hate ‘Big Oil’ stocks. They often demand that institutional investors sell them. This and the drop in oil prices may drive well-established stocks too low. Investment Reporter Key stocks Imperial Oil (TSX─IMO) and Suncor Energy (TSX─SU) remain buys for long-term share price recoveries and rising dividends. 

 

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846