Equifax is a good bet to outperform Apple over the next year.
That’s because Equifax EFX, +2.74% — at least according to a list from 24/7 Wall Street — is the most hated company in America right now, while Apple AAPL, +3.36% is on Fortune magazine’s recently-released list of most admired companies.
Shares of the most-hated companies historically have outperformed most-admired ones, on average. This isn’t to say that Equifax is the better company in any fundamental sense. Apple clearly deserves admiration, having shown an uncanny ability to produce product after product that consumers want. Apple is projected to earn over $50 billion dollars this year, and famed investor Warren Buffett has just increased his stake.
Equifax, in contrast, suffers from not only having allowed a huge data breach last year but also not immediately informing consumers of that breach. It likely will incur huge direct costs in cleaning up its mess — even more from damage to its reputation.
Note carefully, however, that your profit when investing in these or any stocks is not only a function of their underlying economic fundamentals. It’s also a function of their performance relative to investor expectations. Since expectations of Apple’s performance are already sky high, it will have to perform spectacularly in order to not disappoint investors. In contrast, since expectations of Equifax are so low, it won’t take much to beat them.
A horse racing analogy can be helpful here. Imagine a 10-horse race in which any finisher pays off. One horse is the overwhelming favorite while another is expected to come in last. Imagine further that the favorite horse finishes second, while the horse that was expected to come in last instead finishes seventh out of the 10. It’s not inconceivable that you would make more money having bet on the horse than came in seventh than the one that came in second — even though the second-place horse was a faster horse.
Moreover, these theoretical hunches have been verified empirically, according to a study conducted several years ago by two finance professors: Deniz Anginer, a financial economist in the Development Research Group at the World Bank, and Meir Statman, a finance professor at Santa Clara University. The researchers constructed two hypothetical portfolios out of the stocks on Fortune’s annual list — one each for the most-admired and the most-despised companies on the list.
Over a close to 25-year period through December 2007, the Despised Company portfolio outperformed the Admired Portfolio by nearly two percentage points per year, on average. In addition, the researchers found that increases in admiration were followed by lower returns, on average. (See chart, below.)
To be sure, a company’s placement on the admiration-hated spectrum is just one data point to include in your analysis. You shouldn’t always avoid admired companies and invest in despised ones.
One other factor you might want to take into account when considering a despised company is whether it is currently recommended by a market-beating adviser. Equifax jumps over this hurdle, as I reported last fall: Teal Linde, editor of the Linde Equity Report, recommended Equifax soon after its stock plummeted in the wake of the data breach. Below are other companies on 24/7’s Most Hated list that currently are recommended by at least one of the market-beating advisers I track:
• Cigna CI, -1.85%
• Comcast CMCSA, +1.65%
• Electronic Arts EA, +2.19%
• Facebook FB, +0.25%
• Wells Fargo WFC, +0.79%
It can be hard to invest in a company that is on a most-hated list. But, as the saying goes, to find a prince you sometimes have to kiss a frog.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com .