Will Deener: Listening to bellwether companies can give investors an edge
By Will Deener
I’ve noticed that Wall Street analysts and savvy investors have a hierarchy of companies that they closely monitor to try to gain an edge.
These so-called bellwether companies seem to carry undue influence in their respective industries, meaning that when their executives talk, investors listen. There is not an official list of such companies, but we know almost instinctively who some of these players are.
Certainly Apple Inc., Caterpillar Inc. and FedEx Corp. would be on anyone’s list of bellwether companies. If Caterpillar, the equipment maker, mentions slack demand for its products in an earnings call, stock prices for most of the machinery and mining stocks often drop.
Also, McDonald’s Corp., Wal-Mart Stores Inc. and Intel Corp. are considered bellwethers, as their quarterly earnings reports and comments often reverberate through their respective industries and sometimes beyond.
I mention all this because I’ve often wondered how a company reaches the lofty status of bellwether.
Obviously, most are among the largest companies within their industries, but not all of them are. Within the same industry, a smaller company can have more cache than its larger competitor. The smaller company may garner most of the analysts’ attention and be the bellwether.
Sometimes even a highly recognizable company, such as Mattel Inc., would never be considered a bellwether. Being curious about why that occurs, I asked Robert Sweet, managing editor of the Dow Theory Forecasts, a respected investment newsletter, to shed some light on this topic.
In a recent report, he compiled a list of 19 companies he considers bellwethers, and he also quantified what makes one. First, news released by bellwethers will move the stocks of companies both inside and outside their industries.
Mattel may be a solid company, but when it speaks, no one outside the toy industry listens.
“To become a bellwether, companies must have both an outsized effect on their industries but also drive the thinking outside of their direct sphere of influence,” Sweet said.
Secondly, most bellwethers have a market capitalization (the number of outstanding shares multiplied by the price per share) above $50 million. That’s not a huge company, but a company of that size will typically draw significant analyst coverage. A company without much coverage is like someone talking when no one is listening.
“All of our bellwethers are covered by at least twice as many analysts as the average for their industry,” Sweet said.
For example, 31 analysts cover Walt Disney Co., while the industry average is 11. AT&T Inc., the telecommunications giant, has 37 analysts monitoring its every move compared with the industry average of 4.3. Both companies are bellwethers.
Third, and perhaps most important, Sweet said a bellwether must reflect an investment theme. Amazon.com Inc. encapsulates investors’ views on e-commerce. The company is essentially a proxy for online retail.
Similarly, FedEx is a proxy for global business. Its main competitor, United Parcel Service Inc., is more than twice the size of FedEx, but no one considers it a bellwether. Part of the reason for that is FedEx has been a publicly traded company much longer than UPS and it is better known for its global reach.
“UPS has global operations, too, but FedEx did it first,” Sweet said. “When FedEx talks it affects other retailers who are looking at FedEx’s shipping numbers.”
It’s important to note that just because a company has attained bellwether status doesn’t mean it is a good stock investment. Intel shares have been stuck in mediocrity for the better part of three years, and yet it is certainly a bellwether.
The reason any of this matters is that the key to successful stock investing is having information. These bellwethers telegraph important trends to us. They can give investors an edge.
Most people don’t have hours to spend evaluating the market. But if they have only five minutes a day that time would be well spent listening to what the bellwethers are saying.
“If you are thinking about buying industrial stocks,” Sweet said, “it would be better to spend a few minutes listening to FedEx rather than Illinois Tool Company.”