What the Financial Media Don't Want You to Know

By Tim Hanson

July 3, 2008

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I'm going to let you in on an industry secret. It's going to explain why the stock market -- even in this age of unmatched access to information -- is a self-perpetuating machine for mediocrity.

Now, even though this is an industry secret, you've probably picked up on it. In fact, we get emails all the time from frustrated readers who want it to stop. And we're not even the worst offenders.

The two words you'll never forget
Although the Internet has the capacity to cover every single publicly traded stock, only a handful get consistent media coverage. The stocks that earn this special status do so for a very clear reason: There are enough people out there who want to read about them.

In industry-speak, these are "hot tickers."

Hot what?
They're the only stocks out that can generate enough page views to support an ad-based financial media model. And they tend to be large, technology-focused companies. That's why you'll regularly find stories -- often unrelated -- about certain companies from multiple sources, including MarketWatch, paidcontent.org, the Associated Press, Reuters, TheStreet.com, BusinessWeek, TechTicker, Fortune, Barron's, Investor's Business Daily, and even The Motley Fool. We're talking about big names such as Microsoft (Nasdaq: MSFT), Google (Nasdaq: GOOG), and Intel (Nasdaq: INTC), and they pop up even on slow news days. This phenomenon also explains why stocks with cult followings, such as Sirius Satellite Radio (Nasdaq: SIRI) and XM Satellite Radio (Nasdaq: XMSR), are among the most widely reported-on stocks on the market, despite their relative small size and downright paltry recent performance.

It's a vicious cycle. You want to read about these stocks, so we write about them, and because we write about them, more and more people want to read about them. Yet although big tech companies can be fun to follow, they are not likely to earn you outsized returns.

And I'll back up that claim with numbers
There's a famous chart from Fama and French data that looks something like this:

	Value	Growth
Large Cap	12.4%	9.6%
Small Cap	15.4%	9.2%

This chart is telling you that from 1927 to 2004, large-cap growth stocks (the hot tickers) underperformed small-cap value stocks (the stocks you've never heard of) by nearly 6 percentage points annually.

Part of the reason is the big stocks are overcovered by the media and analysts and therefore overbought by investors. And because they're overbought, they remain overcovered. This is the self-perpetuating machine for mediocrity that I referred to earlier.

But you can break from this cycle by being willing to look where others won't.

The flipside
See, even though the system overcovers certain stocks (and renders them pretty efficiently priced), tiny companies such as Brazil Fast Food, U.S. Home Systems (Nasdaq: USHS), and Aladdin Knowledge Systems (Nasdaq: ALDN) can go totally uncovered. In fact, when you quote these names, you generally won't find anything more than press releases, even after earnings or acquisitions are announced.

As a result, no one knows these stocks are out there. Days can pass without a single share of Brazil Fast Food trading hands. Yet if we're willing to study these companies closely, it turns out that underfollowed stocks like these are the ones we should be buying!

Because they will help you make more money
Just last week, Mark Hulbert reported on a new study in The New York Times that found that from 1962 to 2003, stocks that could go at least a day without trading any shares -- like Brazil Fast Food -- outperformed stocks that traded every day by more than 8 percentage points annually. And that was the case even though the "neglected stock portfolio," as researchers Athanasios Bolmatis and Evangelos Sekeris called it, contains "a disproportionate number of stocks that underperform the market by a dramatic margin."

In other words, even though this part of the market can be an opaque niche, there are multibaggers there for the taking by investors willing to do their own legwork.

But few people are
So while most investors will stick and be stuck with the hot tickers, if you want to outperform the market, you need to start following underfollowed stocks. That's what we do at our Motley Fool Hidden Gems small-cap research service, where I focus my time exclusively on companies with market caps of less than $200 million.

You won't find our micro-cap research when you quote your stocks, because there aren't enough people who care to make it a viable business model. But you can read all of our research and recommendations by joining Hidden Gems free for 30 days.

Click here for more information.

Tim Hanson owns shares of U.S. Home Systems and Aladdin Knowledge Systems. Aladdin Knowledge Systems is a Motley Fool Hidden Gems recommendation. U.S. Home Systems is a Hidden Gems PayDirt recommendations. Microsoft and Intel are Inside Value picks. Google is a Rule Breakers selection. The Fool's disclosure policy humbly asks the market to start going back up again.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

On July 03, 2008, at 10:14 AM, SiriusInvestor09 wrote: Report this Comment

To prove the authors point, the only reason why I even skimed this article is because I recieved it on my Sirius newsfeed. How ironic? But here's to the best cult: the Sirius sat. radio investors, with the most passionate investors, and recently bullied stock on the street.
On July 03, 2008, at 1:54 PM, relmor wrote: Report this Comment

No one is more guilty of this than Motley Fool. They throw around Sirius and XMSR as to show you how bad these stocks are weekly. If anything, your part of the problem, not the solution. Articles like this seem purposefully written to keep us away from Siruis stock. Nice try. Goldman Sachs cant make me sell, and either can every Motely Fool writer on the planet. Its in the news all the time because the MSM doesnt want you to own it. This writer probably has some buddies going long on this bad boy. Dont trust any writer online, especially when they start off by, im writing this in your own interest, like that comic writer the other day that has been bashing the stock for years. NO ONE rights an article for YOUR benefit. If you think they do, then your the "real' fool. Listen to the facts. Only satellite radio on the planet. Literally UNLIMITED deal potential with Apple, Yahoo, Blackberry, Verizon, and they can be bought out after the merger, and the asking price will be at least $5 a share. So go take your Sirius reference, and go hike a cliff with them.
On July 03, 2008, at 2:00 PM, relmor wrote: Report this Comment

If every writer and anyalist came on tomorrow and said the real value price for Siruis is $1.50, I would buy more. Sirius stockholders who bought under $3 will be laughing last, and anyone who got scared out of their shares will regret it. Follow the money on this company, and you will see my point. Ill give you some hints.
1. Jessie Jackson(research his entire involvement)
2. Terrestrial radios complaints about it.(this proves their fear) If they thought they would fail, they wouldnt be doing EVERYTHING in their power to stop it.
3. Find out about Sirius CEO. His story explains a lot about what radio thought of satellite radio.
4. EVERY CAR IN THE COUNTRY will have a satellite radio.
5. Check how many deals that Sirius and XM signed that can be renegotiated once the deal is merged. This will be HUGE for their cost savings.
6. Check out when Sterns contract expires. If you owned 200 million shares would you not resign? Would you not want the company to do well? Would you take a huge pay cut to make your stock jump? What do you think?
On July 03, 2008, at 2:40 PM, KWT8011 wrote: Report this Comment

What they don't want you to know.. Tim Hanson, are you moonlighting for Kevin Trudeau???
On July 03, 2008, at 3:18 PM, gghillx wrote: Report this Comment

Why should you be outraged -- or pretend to be -- that major financial media report on stocks that are widely held or of wider interest than others?
A little less faux attitude might make your sales pitch for Hidden Gems more credible. There is certainly a role for you to play finding stocks that may be overlooked.
Disclosure: I work for one of those media outlets you listed.
On July 03, 2008, at 3:47 PM, TMFMmbop wrote: Report this Comment

I don't begrudge anyone for making sure "hot" tickers get into articles. As someone has pointed out, we do this at the Fool. The economics of the business are such that you cannot pay people to cover small and OTC companies. The investment justification just isn't there.
That said, if you're an investor, I believe you should be looking hard at things that no one else is looking at. After all, if there are fewer opinions being registered on a stock, that means that the wisdom of crowds has not yet been able to average that stock's price close to fair value.
As for Sirius, it proves this point. There's nothing out there about Sirius that investors don't know. Thus, it comes down to whether you believe the story or not. For a company like BOBS, the market doesn't know what's going on. Thus, you can gain an informational advantage in the stock...which is a rarity these days.
Glad this article is generating some comments. I'd hoped it would.
Tim Hanson
On July 03, 2008, at 6:17 PM, aw4golf wrote: Report this Comment

Agree with your article!
But please do not start writing about GE, I like where the stock price is because I can afford to buy more. Last year GE paid me $6,935.40 in dividends and will do so again this year, way more than I made in any of the "story stocks".
Right now if CNBC was not owned by GE, nobody would be reporting or writing about GE. After all, it is just an "old story" stock that just continues to make money.
Many of the "Hidden Gems" stocks in my account now show up with just a tracking number, no symbol, the number of shares, and market value of zero (0).
I like Gems that are not hidden, you know, the ones that are right there in front of us delivering money to my account year after year.
So please, don't start "discovering and writing" about GE.
Thank you in advance!
AL
On July 04, 2008, at 6:26 PM, Matt8265 wrote: Report this Comment

Did I hear somebody say... WTF's going on with a Sirius merger now at day 510 (since announcement)..... well... here's my .02565
To Wit;
Commissioner Tate plays Kathy Bates - In the movie "Misery"
Remember the movie "Misery" where Kathy Bates "Hobbles" James Caan so that she can keep him incapacitate just enough to enjoy his company, but to never see him become healthy enough to leave or defend himself? Every time the poor bastard would start to heal, here comes Kathy with a sledgehammer to crush his ankles.
See an analogy here?
The FCC five are not stupid people, in fact, if you look at their writings you'll discover that they are highly intelligent and articulate people. I've read most of their individual works and rulings. However, apparently something is horribly amiss as past history has shown that the average merger processes in less than 9 months .. So why are we here nearing 18 months with two quickly fading companies whose stock is valued by the leading financial house in the ENTIRE world as being worth less than a Big Mac or a quart and a half of gasoline?
Why ... Because the FCC knows very well that this merger is necessary for the proliferation ... no, existence of satrad. They know these companies are deeply in dept and can't sustain themselves for another half year, they know people love the service, they know satrad provides a great pubic service, they know the NAB has had a monopoly for years treating consumers like sheep.... and YOU know all these things are true!
But as Mr. Addlestein's writing hint (and I like him as a person and Commissioner ... he'd make a great future Chairman IMO) the FCC has allowed itself to be controlled by Congress... and Congress has allowed itself to be controlled by the NAB... and the NAB's intent is to destroy Satrad for their own financial benefit.
The FCC has fully relinquished its autonomy under Kevin Martin.
So what is a puppet FCC organization to do? Torn by the dictates of their puppet masters yet intelligent and moral people who realize that they are not doing their duty to consumers or the technology by nixing this arrangement.
They "Hobble" Sirius and XM with delay via meetings and lobbyists, and meetings and ex partes and people looking for handouts ... very much like Kathy hobbled James. They take XM and Sirius within inches of their lives. This way, when they are finally tired of the game, and primarily their careers are assured, they can have it as close to "both ways" as possible. Please their Congressional puppet masters and (lastly) hopefully the public.
This is exactly what they have done!
Let's hope it's not too late.
Go Jimmy Go!
On July 07, 2008, at 9:37 AM, WPThatcher wrote: Report this Comment

The chart from French and Fama is very interesting, but I would like to know how they define small cap v. large cap, and growth v. value. That would make all the difference.
On July 08, 2008, at 6:09 PM, Seanakin wrote: Report this Comment

The whole "hot tickers" story sounds like one more correlation between individual investing and fantasy sports, i.e. for years I was frustrated by the lack of coverage on minor leaguers while all the ubiquitous media sources kept devoting paragraphs galore to the big-name players already known to everyone. Not exactly helpful when you're looking for an edge...which is why I tend to ignore the hot stocks touted ad nauseam on TV. That, and they distract my attention from all the money honey eye candy.
On July 10, 2008, at 5:37 PM, whoareyoukidding wrote: Report this Comment

So the stocks with less publicity are supposed to perform better than those with more publicity... Well, I guess your pick for the next Berkshire Hathaway must be right because it's only plastered everywhere on the internet.
On July 13, 2008, at 10:15 AM, whirlybrd wrote: Report this Comment

"So the stocks with less publicity are supposed to perform better than those with more publicity... Well, I guess your pick for the next Berkshire Hathaway must be right because it's only plastered everywhere on the internet."
That's funny. The whole thread made me chuckle. I do agree in this: the very fact that the Motley Fool recommends a stock, that fact alone will drive the price up artificially.
I take it all with a pinch of salt, and do my own research. The value of MF is people's dry comments, the forums, and outspoken jibes such as contained here. Not... their actual picks....!

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