Companies Ignored by Institutions Can Prove Strong Performers
In Washington Investing 101 -- and most books on personal finance -- the first chapter is "The Magic of Compounding," a discourse on how your money can grow if you let gains build year after year.
There are few better examples than American Capital Strategies Ltd., a Bethesda company that provides financing for medium-size businesses.
By revenue, American Capital is one of the 10 fastest-growing mid-size companies in The Post 200 roster of local public companies.
Based on stock market performance alone, it has been a middle-of-the-pack long-term performer. However, American Capital pays one of heftiest dividends in town and cranks it up almost every quarter. The 80 cents a share paid last quarter amounts to a yield of better than 9 percent a year based on the current price of the company's stock, $34.82 a share.
Investors looking for current income often buy American Capital just for the regular dividend checks. But if instead of taking the money, you roll those dividends over into more shares, American Capital boasts that its total return for the past five years comes to 127 percent, or 18 percent on an annualized basis.
That's the magic of compounding, plus an extra sweetener that the company factors into its calculation: its dividend reinvestment program, or DRIP. Like many companies with a DRIP, American Capital gives investors who roll their dividends over a 5 percent discount on the additional shares. Over time, that reinvestment discount adds about 1 percentage point a year to the total return.
The steady drip of dividends is why American Capital stock is so popular with Washington investors.
Unlike most firms its size -- it has a stock market value of $4.5 billion -- and unlike most of the other fast-growing mid-size firms in the region, American Capital stock is largely owned by individuals, rather than institutions.
Mutual funds, pension pools and other professionals hold only about 40 percent of American Capital's stock. The other 60 percent is owned by small investors
Among the 10 fastest-growing mid-size companies in the region, only Bresler & Reiner Inc., a Rockville real estate firm, has a higher percentage of individual ownership. And its shares trade on the over-the-counter bulletin board. That market is considered off limits by professionals because the companies listed there are so small.
But companies owned largely by mom-and-pop investors can produce good returns for people willing to take the risk and put in the work to find them.
At the top of the list of the local companies with the best returns over the past five years are Varsity Group Inc., with only 6 percent institutional ownership; Dialysis Corp. of America, with 18 percent institutions; and TVI Corp. The pros have recently discovered TVI and own about 45 percent of its stock, but the company had no institutional investors at all a few years ago.