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Lawrence A. Cunningham’s Quality Investing: These cool, high-quality stocks are just right for this overheated, overvalued market

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Overheated markets make it increasingly difficult to identify attractively priced investments. But with hordes of buyers plunking capital on meme stocks and cryptocurrencies, quality shareholders (aka buy-and-hold stock pickers) continue to see opportunities for the long term.

Take Boyar Value Group. Since 1975, it has provided insightful research on a range of businesses. The father and son team of Mark and Jonathan Boyar also eat their own cooking, being quality shareholders (QSs) themselves as operators of the Boyar Value Fund
BOYAX,
-0.60%
.

The Boyars have been prescient: shortly after the coronavirus pandemic hit and took down the U.S. stock market, they released a special report detailing 19 companies whose shares they recommended amid the selloff.  One year later, a portfolio of those stocks was up 78%, besting the S&P 500
SPX,
-0.21%

by 27 percentage points.

Boyar Value Group produces the Forgotten Forty, a year-end report on 40 stocks they view as overlooked.  Barron’s highlighted seven of the picks earlier this year — a diverse mix that included Bank of America
BAC,
-1.45%
,
Liberty Braves Group
BATRA,
-1.18%
,
and Sysco
SYY,
+1.42%
.
Those seven stocks since have gained 17% versus 12% for the S&P 500. 

Boyar’s Forgotten Forty is an excellent filter for stock pickers as they narrow their hunt. One way to tailor picks is to cross-check these 40 companies with those of companies that score high for attracting QSs.

Many investors mimic the portfolio of uber-QS Warren Buffett of Berkshire Hathaway
BRK.A,
-0.73%

BRK.B,
-0.87%
,
for instance. Other QSs can be identified using such resources as Martijn Cremmers’ active share rankings, proprietary data analytics of EQX, or research of my own Quality Shareholders Initiative (QSI) — all useful tools to construct a high-performing portfolio.

Combining the Forgotten Forty with such data, below are three stock ideas to consider as part of a larger portfolio. (Of course, this is not investing advice or a recommendation to buy — just a few suggestions to consider.)

UniFirst Corporation

UniFirst Corp.
UNF,
+0.26%
,
founded by the Croatti family in a Boston barn in 1936, is a uniform rental company currently employing more than 14,000 in 260 facilities in North America and Europe and generating nearly $2 billion in annual revenue. It is number three in an oligopolistic industry — along with Aramark
ARMK,
-0.64%

and Cintas
CTAS,
+0.27%
,
the trio commands 70% of the market — which enables rational industry pricing. 

UniFirst’s core laundry business runs on multiyear contracts, creating recurring revenue. Customer retention rates are high and employee tenures are long, and the company carries no debt.  Along with a strong cash position, the U.S. economic reopening ahead bodes well, particularly with UniFirst’s large customer base in the energy sector. Boyar’s valuation: $263 per share, well-above recent levels.

Members of the Croatti family are major shareholders, with 20% of the economic interest and 71% of the voting power, under a dual-class capital structure. Despite how some governance gurus roundly condemn dual class structures, QSI data indicates that QSs examine the practice on a case-by-case basis. 

UniFirst is a magnet for QSs, increasingly so in recent years as the company has enhanced its capital allocation rationality through share buybacks and dividends. In terms of concentration levels and holding periods, the company’s shareholders treat it far better than they treat their other investees, EQX data indicates.  A sampling of UniFirst’s QSs: Aurora Investment Counsel, Copeland Capital Management, Hunter Perkins Capital Management, London Company of Virginia and River Road Asset Management.

Comcast Corporation

Comcast
CMCSA,
+0.07%
,
a cable industry pioneer founded by Ralph Roberts in 1963, is a global communications powerhouse with diverse investments in related sectors, especially in technology. The business, with annual revenues exceeding $100 billion, proved resilient during the pandemic, with durable strengths in both broadband and streaming, and an expected bounce from reopening of its theme parks.

Communications businesses such as Comcast’s combine highly valuable intangible assets with little need for reinvestment in tangible assets—particularly appealing during inflationary periods. Boyar’s valuation: $76 per share, comfortably above market.

Comcast is another magnet for QSs, and another dual class company, in which Brian Roberts holds 1% of the economic interest along with 34% of the voting power. Among QSs owning Comcast shares: Eagle Capital, First Pacific Advisors, Rothschild & Co. and Southeastern Asset Management. Note also: Nelson Peltz’s Trian Fund accumulated a large stake, about 0.4%, in several transactions during 2020.

Bank of New York Mellon

Bank of New York Mellon
BK,
-1.20%

is the world’s largest custodian bank and asset servicing company, with $2 trillion in assets under management and close to $40 trillion in assets under custody. The company is a blend of two storied institutions: Bank of New York has roots back to Alexander Hamilton and Aaron Burr in 1784, while Mellon traces to the bank Andrew Mellon began in 1869.

Today, with annual revenues reaching $16 billion, the firm is distinguished for achieving outsized cost savings from a high-tech digitized platform. It is using artificial intelligence and machine learning to automate many functions, from financial calculations to client inquiries. BNY Mellon’s scale in the custodian business positions it well to win the trillion-dollar accounts of the world’s largest asset managers.    

Boyar’s valuation for BNY Mellon is a conservative $50 per share, suggesting there’s still some upside. BNY Mellon enjoys one of the highest-quality shareholder bases in the US, according to EQX and QSI research. Prominent QSs include: Berkshire Hathaway, Davis Selected Advisers, Dodge & Cox, Lountzis Asset Management and Tweedy Browne.

Three picks do not a portfolio make, of course. So consider these other interesting ideas from the Boyar Forgotten Forty that also boast high-quality shareholder followings: Walt Disney
DIS,
+1.07%
,
IAC/InterActiveCorp.
IAC,
-5.56%

and Merck
MRK,
-1.94%
.

In a volatile market like now, all of these companies offer a substantial measure of stability.  For veteran investors and newcomers alike, keep in mind that it is foolish to follow the herd, and wise to heed the thoughtful.  

Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group, and publisher, since 1997, of The Essays of Warren Buffett: Lessons for Corporate America. Cunningham owns shares of Berkshire Hathaway and has no position in any of the other stocks mentioned in this article. For updates on his research about quality shareholders, sign up here.

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