CWS Market Review – August 17, 2021

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Imagine there’s a stock that’s up more than 35-fold in the last 20 years and it’s not followed by a single Wall Street investment analyst.

This investment has crushed just about every hedge fund out there, yet Wall Street is completely unaware of it.

Worst of all, it’s stock in a company that’s known by many. In fact, it’s a favorite of people who work on Wall Street.

The stock I’m talking about is Nathan’s Famous (NATH).

That’s right, the hotdog stand. Nathan’s is not only a great New York institution, but it’s also been a big long-term winner for investors.

Nathan’s is what we call an “Orphan Stock.” That means that it has zero or near-zero analyst coverage.

I love Orphan Stocks. They’re a great place to find overlooked values. Some of the big-name stocks on Wall Street are followed by 20, 30, even 50 analysts. These stocks live in glass fishbowls, but that’s not the case with Nathan’s, which, despite its name, apparently isn’t nearly as famous as I thought.

There are lots of great Orphan Stocks. Ever heard of Atrion (ATRI)? Don’t worry. You’re not alone.

Atrion is a medical-products company based in Dallas. Even though it’s small ($1.2 billion market cap), Atrion is strong in some niche markets like soft-contact-lens disinfection cases. Do you wonder who makes valves for life vests? There’s a good chance it’s Atrion.

Twenty-two years ago, you could have picked up one share of ATRI for $7. The stock closed Tuesday at $665 per share.

Now I’m going to ask you a very easy question: Guess how many firms on Wall Street cover Atrion? I’ll give you a hint. It’s the same as Nathan’s.

That’s right. Zero.

The S&P 500’s had a good run over the years and it looks like a flat line in comparison to ATRI.

How can a stock rise so much for so long and no one on Wall Street has ever thought to start covering it? Part of the reason is that they don’t bring Wall Street any investment banking business.

That’s more of a plus than a minus. It suggests that the company hasn’t entered into any unwise mergers. Or taken on too much debt. Or been acquired at a poor price. Not needing a banker is hardly a bad thing.

Let’s also remember how hard the financial crisis blew through Wall Street. The big houses simply don’t have the big research departments like they used to. The budgets have been cut back. As a result, there are lots of companies that get no analyst coverage.

A few years ago, Jason Zweig highlighted the best-performing stock of the last 30 years. Far from being a well-known large-cap tech stock, the big winner was Balchem (BCPC) of Wawayanda, NY. The company makes “flavorings, fumigating gases and nutritional additives for animal feed.”

Sexy!

From 1985 to 2015, Balchem gained over 107,000%. Zweig noted that Balchem didn’t attract a single major institutional holder until 1999. That was after it returned an average of 21.3% for the previous decade. Even today, Balchem is followed by a grand total of three analysts. Compare that with Facebook, which is followed by over 50.

Every earnings season, investors gather to see what companies have beaten expectations and what companies have fallen short. But for Nathan’s and other Orphan Stocks, there’s no “Street consensus” because no one follows them. For an investor, that’s another bonus. You don’t have to worry about the quarterly earnings game.

Consider an Orphan stock like Chase Corporation (CCF), which is a specialty-chemical company based in Westwood, MA. Chase is one of those Warren Buffett-style stocks. The only difference is that you have to move the decimal point over a few notches. Chase is a quiet firm that consistently generates strong cash flow. It’s a well-run cyclical, with gross margins typically around 35%.

Over the last 20 years, Chase has gained over 2,700%. That’s enough to beat Microsoft (the blue line). Again, no one follows it.

These aren’t microcaps, either.

How about the wonderfully named U.S. Lime & Minerals (USLM)? Since 2003, it’s returned more than 40-fold (dividends included). Zero analysts cover it. In 1990, Century Bancorp (CNBKA) hit a low of $1 per share. Today, it’s at $114 per share, and it’s paid dividends all along the way. Number of analysts? Zero.

Another benefit of investing in Orphan Stocks it that with fewer eyes watching a stock, there may be a better chance of finding a mispriced stock. I wouldn’t say the market is efficient, but the inefficiencies have a better chance of showing up where others aren’t looking for them.

Also, these businesses tend to be fairly easy to understand. Orphans often don’t have arcane off-balance-sheet items or operating divisions around the world. A hobbyist-investor can invest an afternoon and read through a company’s SEC filings and be well-informed on the business.

If you have more questions, you can do something few investors think of: call the company and ask to speak to someone. Better-run companies are happy to speak with their investors. After all, the shareholders are the owners.

You’ll often hear that the type of value investing that Warren Buffett and Charlie Munger made their fortunes on is no longer possible in the world of mass data and Bloomberg terminals. That may be right in terms of amassing a multi-billion fortune, but there are plenty of companies operating well below Wall Street’s radar.

Here are two more:

The Hingham Institution for Savings (HIFS) dates back to 1834. In 1990, the stock was going for just over $1 per share, adjusted for splits. Today it’s at $299. Hingham has consistently increased its dividend over the last 25 years. I love how this company treats it shareholders. Last year, Hingham paid out a special dividend of $1.17 per share on top of its regular dividend.

In the chart below, Hingham is the black line. The blue line is Berkshire Hathaway.

I first told you about the Texas Pacific Land Trust (TPL) in April. The company has a colorful history. It was born over 130 years ago when the Texas and Pacific Railway went bust. The aim of the T&P was to build a southern transcontinental train route. Despite the name, the T&P never made it to California.

The railway was left with a ton of land and a ton of debt. The trust was formed with 3.5 million acres of land that the railway owned. People who held the railway’s worthless bonds got shares of the new land trust. Some oil came along, the trust made money and everyone was happy. Eventually, the shares started trading on the NYSE in 1927.

In 1995, you could have picked up a share for $3.50. Recently, TPL’s been trading at $1,425.

Even though TPL has an amazing track record and a market cap of $11 billion, I don’t want you to think that it’s completely ignored by Wall Street. Not at all!

Two analysts cover it.

We currently have one Orphan Stock on our Buy List which is Miller Industries (MLR). I have high hopes for Miller, and the company recently had a good earnings report.

I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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