I’ve long been sector-agnostic when it comes to the companies I’m interested in because I believe that great companies – and thus, great stocks – can come from anywhere.
My belief was formed because of something I learnt more than a dozen years ago about the US-based airline, Southwest Airlines. Ned Davis Research was tasked by CNN’s MONEY Magazine in 2002 to find the five US-listed stocks with the highest returns over the past 30 years. The winner was Southwest Airlines with its annualised return of 26% from 1972 to 2002; a $1,000 investment at the start of the period would have become $1 million by the end. What is noteworthy here is airlines were widely regarded back then as businesses with horrendous economics. In Berkshire Hathaway’s 2007 annual shareholders’ letter, Warren Buffett wrote (emphasis is mine):
“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.
The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it. And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt. Twice.”
And yet, it was an airline that topped the charts in 2002 for the best-performing US stock in the past 30 years. The timeframe of 30 years is also sufficiently long, such that Southwest Airlines’ gains had to be the result of its business’s excellent long-term performance, and not some fortunate short-term hiccup in the fortunes of its business or its stock price.
A recent study from the highly-regarded investment researcher Michael Maubossin, titled Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation, bolsters my belief. He found that differences in the return on invested capital (ROIC) between industries is lower than the differences in ROICs of companies within industries. In Mauboussin’s data-set, the industry with the highest median ROIC from 1963 to 2023 is Personal Care Products at around 18%. But within Personal Care Products, the companies have ROICs ranging from a low of around 5% to a high of around 40%. Meanwhile, the Wireless Telecom Services industry has one of the lowest median ROICs at around 1%. Yet, the companies within have ROICs ranging from just below 40% to deeply negative figures. Said another way, the best company in a poor industry (Wireless Telecom Services) still has an excellent business that performs significantly better than the median company in a great industry (Personal Care Products).
I continue to believe that excellent investing opportunities can be found everywhere, so I will, for the foreseeable future, remain sector-agnostic. Sometimes, a gleaming diamond can be found amongst a lump of coal for those with the ability to spot a true bargain.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have no vested interest in any company mentioned. Holdings are subject to change at any time.