As Facebook IPO nears, the case for dull stocks

Investors thinking of buying a piece of Facebook after it goes public are hoping it will perform like Google, whose stock has risen 500 per cent since its debut seven and a half years ago.

But they may want to spare a thought for companies slightly less exciting — a truck leasing company, perhaps, or a manufacturer of ball bearings.

Stocks of those two have left Google, and the investors who didn't get into it early, in the dust in the past several years. So have more than half the companies in the Standard & Poor's 500 index.

Since the stock market peaked on Oct. 9, 2007, Ryder System Inc., which rents moving trucks, has returned 26 per cent, counting dividends. Timken, the ball bearing company, 49 per cent.

And the staid Johnson & Johnson, the 125-year-old maker of Tucks ointment to relieve hemorrhoids among thousands of other products, has trounced Google, too — returning 12 per cent with dividends.

Google is up more than most stocks if you pick a different starting point, like 2004. But measured from the market peak, it's down 1.5 per cent. In other words, the people who got in then still haven't broken even — four and half years later.

Even Microsoft, the lumbering software company whose best days are widely considered behind it, has done better, returning 12 per cent, counting dividends.

The lesson is that when it comes to hot stocks, you can sit on losses for years if you happen to buy at the top and can't make up ground with dividend checks.

"They move like rockets, straight up," says Robert Russell, president of Russell & Co., a wealth management company in Ohio. "But they can fall back to earth, too."

In a filing earlier this month, Facebook said it plans to sell a yet-unknown stake for $5 billion, the largest for an Internet company's initial public offering. The buzz is that the offering could value the whole company at as much as $100 billion — more than Hewlett-Packard, AOL and Yahoo combined.

Whether the newly public stock — ticker symbol FB — will prove profitable for investors is another matter.

For a taste of the dangers of buying stock in companies in the spotlight, check out the performance of Internet IPOs last year. You've done OK if you got in at the offering price, set before the stock starts trading. But that's mostly reserved for the favored customers — pension funds, mutual funds, hedge funds and other institutions. The little guy isn't doing nearly as well.

After sharp rises on the first day of trading, most stocks have fallen. That's true for Groupon Inc., the online daily deals site, Pandora Media Inc., an Internet radio operator, and the consumer reviews site Angie's List Inc.

Even the online professional network LinkedIn Corp., a stock that surged Friday on news of unexpected big quarterly profits, is down 4.6 per cent from its IPO close.

In hindsight, people looking to strike it rich should have stuck with the IPOs of companies more obscure, like fertilizer maker CVR Partners. Since its public debt in April, the company, which sells nitrogen fertilizer to farmers from a factory in Kansas, is up 77 per cent.

Its lucky owners also get something those of pie-in-the-sky Internet outfits can only dream about — dividends. CVR is expected to send checks to its shareholders over the next year of $2 per share, or 8 per cent of its stock price even after the big run-up.

As it turns out, dividends have played a role in other recent triumphs of the boring over the bedazzling.

During the stock market swoon from Oct. 2007 to March 2009, Johnson & Johnson stock fell only half as much as Google. That's because J&J still has a fat 3.5 per cent dividend yield. Google doesn't pay a dividend.

Those checks in the mail helped on the way up, too. Without dividends, J&J would have lost 2 per cent since the market peak instead of returning 12 per cent. Microsoft would be up just 2 per cent instead of 12 per cent.

Those companies can pay dividends because they make big profits, another thing lacking at many Internet companies. Internet bulls don't seem to be bothered, preferring to focus on sales. The idea is if you grow them fast, profits will come naturally.

But investors can lose patience waiting.

On Wednesday, Groupon announced that it had tripled revenue last quarter providing deals on restaurant meals, hotel stays, manicures and the like. No matter. The company also said it hadn't turned a profit — not yet at least. Its stock fell 14 per cent.

Facebook is already profitable, but not enough to justify that top-end value of $100 billion. At that lofty height, the company would trade at 145 times what it earned in 2011. The S&P 500 is trading at 15 times last year's profits.

So investors are talking about Facebook's almost $3.7 billion in sales last year, which helps justify the value a bit more, maybe. At $100 billion, Facebook stock would be trading at 27 times sales. LinkedIn is trading at 20 times and Google at five.

We'd all be rich, of course, if picking stocks was just a matter of checking sales multiples or dividend yields or any other simple gauge. Apple doesn't pay a dividend, for instance, but that didn't stop it from rising. Facebook could indeed become the next Apple.

But when it comes to investing, you could do worse than avoiding exciting new businesses in the headlines and putting your money instead into tired old ones you never see articles about, and wouldn't care to read if you did.

Like a company hawking deep fryers.

National Presto Industries makes Big Daddy fryers and other kitchen gadgets as well as what's delicately called "incontinence products," better known as adult diapers. It's run out of a cinderblock converted World War II munitions factory in Eau Claire, Wis., by Maryjo Cohen, a woman so frugal she refused for years to fly anything but coach on business trips, upgrade from Microsoft Office 97 on her computer or replace the Eisenhower-era iron desks at headquarters.

Better to save money for dividends, which the company has been paying for 67 years. That's 40 years before the birth of Mark Zuckerberg, the hoodie-wearing Facebook CEO.

Cohen prefers sensible skirts and blouses but somehow has managed to lift Presto stock up 90 per cent above where it was trading at the stock market peak. With dividends, it's returned 157 per cent.