Image Credit: Christophe Vorlet
By Jason Zweig | Jan. 29, 2016 1:17 pm ET
The best-performing U.S. stock over the past 30 years isn’t a household name like Costco Wholesale Corp. or Johnson & Johnson. It’s Balchem, up 107,099% since the end of 1985, according to FactSet Research Systems.
You’d never heard of Balchem? Me either; stocks don’t come much more obscure than this. Based in Wawayanda, N.Y. (population 7,266), about 70 miles northwest of New York City, Balchem makes flavorings, fumigating gases and nutritional additives for animal feed. Its total stock market value is about $1.7 billion.
Since the end of 1985, Balchem has gained an average of 26.2% annually, compared with 10.3% for the S&P 500 and 15.7% for Warren Buffett’s Berkshire Hathaway Inc.
You shouldn’t drop everything and buy the stock. The top-performing companies of the past three decades aren’t likely to remain the best in the decades to come. And with flattening profitability and shares at a lavish 27 times earnings, Balchem looks expensive for now.
(The company said no one was available to comment by press time.)
But you can learn from Balchem and its peers for free. Over the past 30 years, 44 U.S. stocks generated cumulative total returns of 10,000% or more, according to FactSet. The 10 behind Balchem are Home Depot Inc., Amgen Inc., Nike Inc., UnitedHealth Group Inc., Danaher Corp., Altair Corp., Kansas City Southern, Jack Henry & Associates Inc., Apple Inc. and Altria Group Inc. All grew by at least twice the rate of the S&P 500. Investment manager William Bernstein of Efficient Frontier Advisors in Eastford, Conn., has christened such companies “superstocks.”
Perhaps the most notable thing they share, says David Salem, chief investment officer at Windhorse Capital Management in Boston, is that “they have all undergone at least one near-death experience.”
Jack Henry, which provides technology services to banks, lost more than 82% of its market value between 1986 and 1989. Apple’s stock fell by 79.6% between 1992 and 1997 and ultimately underperformed the S&P 500 by a staggering 771 percentage points.
“Just think about that minus-771 number,” says Mr. Salem. “There are no investment professionals in the world who bought Apple 30 years ago and held it continuously ever since — except liars.”
Balchem shows the patience, grit and good luck it takes for a company to turn into a superstock.
The firm began in 1967 as a specialty-chemicals company that made ingredients for hairspray and ink, among other things, says Raymond Reber, who stepped down as chief executive in 1997.
In 1996, Balchem was losing so much on a new technology to coat nutrients that “it was crazy,” says Mr. Reber. “We couldn’t operate that way.” So, he recalls, he told the company’s factory workers, “‘You have to figure out a way to double our production without raising our costs.’ And they did it.”
But the transition was rough. Balchem’s shares dropped 57% in 13 months between late 1997 and the end of 1998.
Dino Rossi, who was Balchem’s chief executive between 1998 and last year, remembers a staff engineer pointing out long ago that its nutritional choline salts might have a nonfood purpose: to help stabilize clay deposits. Years went by before fracking for oil and gas created a bonanza for that use. The end result: tens of millions of dollars in revenue for Balchem.
“You never know for sure where good ideas will come from,” says Mr. Rossi, “and it doesn’t happen overnight.”
It took years for Balchem to perfect microcapsules that could survive the harsh acids of a cow’s first stomach and then release nutrients farther along in the animal’s digestive system. “You have to be constantly working the technology harder,” says Mr. Rossi.
Can only a professional stock picker pluck a company like Balchem out of obscurity? The stock didn’t attract a single major institutional holder until 1999, even though it had returned an average of 21.3% annually over the previous decade. And the odds that any professional investor would hang on to such a stock while it fell 57% are nil.
Investment professionals often ridicule index funds — those autopilot portfolios that mechanically own every stock in a market benchmark — for holding overpriced stocks and riding them all the way down. But one of the unsung virtues of index funds is that, by design, they cling to their holdings through even the worst downdrafts.
Balchem has been included in the Wilshire 5000 Total Market Index since 1986 and appears to have been held by index funds since at least early 1998.
When companies decline 50% to 80%, index funds won’t sell them. Most stock pickers will, however. If some of those companies bounce back and turn into superstocks, index investors get to go along for the full upswing.
In the long term, capturing the full upward sweep of a superstock requires enduring several near-death experiences along the way. That’s reason No. 147 why, for most people, index funds make superior sense.
Source: The Wall Street Journal