What are we looking for?
The league of unknown stocks.
All right, I exaggerate. But not all stocks receive the same attention and sometimes the ones that rarely enter the spotlight can be surprisingly attractive.
Unlike better known names, which are scrutinized to death by the public and analysts, stocks that live in the shadows may prove to have unappreciated strengths – especially if there isn't an obvious reason for why they're being overlooked.
How we did it
I started by looking for stocks on the Toronto or New York exchanges with market capitalizations of at least $500-million in either Canadian or U.S. dollars, as appropriate. I then narrowed the field by requiring them to be covered by no more than three analysts, a relatively small number for firms of this size.
There are several reasons why these companies may not be followed more widely by the investment community. One is that they're dogs.
To reduce the chances of obvious losers popping up on this screen, I required firms to have an average return on equity of at least 10 per cent over the past five years. Furthermore, I wanted only companies that are well regarded by the few analysts that do cover them; to ensure this, I required them to have an average analyst recommendation of at least three – on a scale where one equals "sell" and five equals "strong buy."
Finally, I asked that they have a dividend yield of at least 2 per cent. A firm that is paying out that much cash is signalling that it's confident enough of its financial future to disburse generous dollops of money to shareholders.
What we found
Only 13 companies passed the screen. Two of them are from Canada – Leon's and Corby Distilleries. The U.S. entries include firms such as publisher John Wiley and holding company NL Industries.
A screen of this type is just a starting point for your own research. (You can start by reading Wednesday's Vox column, which looks at Leon's and has also recently covered NL Industries.) While it's tough to generalize about low-profile securities, it would be surprising if the league of unknown stocks didn't harbour at least one unsung superhero.