The Home-Run Stocks Wall Street Doesn’t Know About

Imagine there’s a stock that’s up more than 30-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; it’s 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. Recently, the stock got up to $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 they don’t bring Wall Street any investment banking business.

That’s more of a plus than a minus. It suggests 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 crises 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.

Four 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 two 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%. Best of all, Chase doesn’t carry a dime of long-term debt.

Over the last 25 years, Chase has gained nearly 6,000%. That’s enough to beat both Microsoft and Intel. 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 30-fold (dividends included). Zero analyst coverage it. In 1990, Century Bancorp (CNBKA) hit a low of $1 per share. Today, it’s at $76 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 to 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 it.

Also, these businesses tend to 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 a few examples of Wall Street Orphans

Miller Industries (MLR) of Ooltewah, Tennessee. Miller Industries makes and sells towing and recovery equipment. The company makes the wreckers used to move disabled vehicles.

They also make those multi-tier car carriers that you often see on the road. If a car or truck needs to be hauled out of something or hauled to somewhere, odds are Miller’s got a vehicle that can do it.

Miller Industries is a good example of a company with a strong “moat.” There are competitors, but it’s the dominant name in the business.

Since its low in 2000, MLR is up 8,000%. Zero analyst coverage.

Simulations Plus (SLP) makes software that lets drug companies simulate tests of their products in the virtual world before using any human or animal test subjects.

This is a big cost-saver for drug companies. Simulations Plus helps streamline the R&D process by making it faster and more efficient. Not only is this cost-effective, but it also helps drug companies deal with time-consuming regulatory hurdles.

Earlier this month, Simulations reported that net revenues rose 23.8% and gross profit increased 26.5%. Two analysts follow it. It was recently added to the S&P SmallCap 600.

The Texas Pacific Land Trust (TPL) 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 of 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. (On a technical point, Texas Pacific Land Trust is not a REIT. It’s a land trust.)

In 1995, you could have picked up a share for $3.50. Recently, TPL’s been trading at $585. One analyst follows it.

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 $178. 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 60 cents per share on top of its regular dividend.

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

Posted by on July 21st, 2020 at 8:33 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.