Audrey Deschenes
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‘Boring’ stocks generate better returns, study says

Like the hare and tortoise, slow and steady may win the race

The exciting stocks in your portfolio may not be all they’re cracked up to be as recent research suggests those in more mundane industries may be pulling the weight when it comes to returns.

When all is said and done, stocks in exciting industries, like computer software and pharmaceuticals, have lower returns than banking and utilities stocks, according to a recent working paper from the National Bureau of Economic Research, the same organization that determines when U.S. recessions start and end.

A cursory glance at those outlier sectors, as represented by the S&P 500 IndexSPX, -1.34% appears to show that’s the case.

Sector or subsector12-month performanceAverage Dividend YieldAverage market-to-book ratio
Software20.5%0.97%5.7
Pharmaceuticals38.8%1.42%6.6
Banks-0.4%2.02%1.1
Utilities30.5%3.26%2.0

NBER researchers looked at a how much profitability varied between companies in a given industry to determine how salient, or exciting, a given sector was. They found that companies in industries where profitability didn’t vary widely -- the boring ones -- tended to have lower market-to-book ratios and lower valuations than exciting companies.When the researchers ran an analysis of the respective companies and compared the returns on equity, they found that while the exciting companies had higher valuations, they tended to have lower returns and lower discount rates.

While the NBER researchers explained that higher valuations could be the result of things like a higher media profile for exciting stocks, or that higher uncertainty about profitability leads to a higher market-to-book ratios, they concluded their analysis supported it’s a simple issue of mispricing.

“Our analysis shows that mispricing can better explain the positive relation between valuation and industry saliency than explanations related to limited attention, uncertainty about mean profitability, and risk,” the researchers noted.

For a more detailed analysis, the full working paper, “Are Firms in ‘Boring’ Industries Worth Less?,” can be found at NBER’s website.

Researchers used the French-Fama 49 classification rather than S&P 500 classification to break down industries:

Top 10: Widest profitability variations by industry
IndustryDispersionNumber of companies
Computer software0.258116
Pharmaceuticals0.25778
Precious metals0.2546
Tobacco0.2436
Communication0.21151
Coal0.2085
Computers0.20362
Business services0.195125
Entertainment0.19125
Personal services0.18924
Bottom 10: Narrowest profitability variations by industry
IndustryDispersionNumber of companies
Fabricated products0.136116
Insurance / construction materials0.13572 / 83
Trading0.131158
Textiles0.12928
Candy & soda0.12410
Other / Shipping containers0.12312 / 19
Aircraft0.12016
Business supplies0.11633
Banking0.102194
Utilities0.072142