Lone S&P 500 Stock Ignored by Wall Street Is Paying the Price

Loews Corp. is just a middling stock nowadays, eking out gains that are dwarfed by the market’s high-flyers. Much of this can be chalked up to run-of-the-mill sort of stuff — weakness in one business, soaring costs in another.

(Bloomberg) — Loews Corp. is just a middling stock nowadays, eking out gains that are dwarfed by the market’s high-flyers. Much of this can be chalked up to run-of-the-mill sort of stuff — weakness in one business, soaring costs in another.

But there’s also this: the company, a conglomerate owned by the Tisch family with a hodge-podge of interests ranging from natural gas to insurance to hotels, is the lone stock in the S&P 500 index that doesn’t have a single analyst rating from a major bank or research firm. The last firm to cover it, Zacks Investment Research, dropped its rating in 2019. Since then, Loews has underperformed the broader S&P index by more than 20 percentage points, reversing some two decades of outperformance.

It’s not a coincidence. KPMG concluded in a 2018 study that investors undervalue conglomerates by about 15% on average and that a lack of analyst coverage is partly responsible for that discount. Wall Street fell out of love with the conglomerate years ago, as evidenced by the breakup of GE, a stock that was once so adored it came to symbolize the roaring bull market of the ‘90s.

Today, conglomerates are seen as too complex and tricky to value for analysts who generally focus on single industries. Even Berkshire Hathaway, the conglomerate run by Warren Buffett, gets little attention from analysts. Only four firms follow the stock, which ranks 497th in terms of volume of coverage in the S&P 500.

Seeing reduced analyst coverage or losing it altogether can have severe consequences for companies. 

“Not only does it weigh on shares, but it also impacts economic outcomes like investment and financing,” said Emilie Feldman, a professor at The Wharton School of the University of Pennsylvania who collaborated on the KPMG study. 

It’s also a problem for investors wondering if they should buy, hold or sell the individual stock.

“That’s one of the dangers if you’re not an active stock picker,” said Kim Forrest, chief investment officer at Bokeh Capital Partners. “You could get behind, and if something dramatically changes on an under-covered company, you could, over time, lose the value of your investment.”

A Complicated Cover   

Loews is a family-owned company that was founded in 1959 by Larry and Bob Tisch. The two brothers began purchasing real estate and eventually branched out into other industries including tobacco, insurance, energy — and even media through a 25% stake held in CBS, where Larry was CEO from 1986 to 1995.

Because most Wall Street firms group stock coverage by industry, it can be difficult to determine where a conglomerate fits and can mean only one piece of the company gets sector-specific attention. 

Loews “has so many different facets,” said Forrest. “Naturally, nobody could pick this up.”

Potential Loews investors aren’t going in completely blind as CNA Financial, its publicly-traded insurance line, has four analysts watching its business. 

“As an insurance analyst, I feel like I can offer useful insights into CNA’s operations, but less so on Loews’ non-insurance options,” KBW analyst Meyer Shields said. 

Loews had as many as six analysts follow it in 2005 and 2007, but numbers dwindled as analysts retired or moved to larger banks with more focused coverage.

Bob Glasspiegel, previously a managing director at Janney Montgomery Scott who was drawn to companies with low coverage, followed Loews for more than 30 years. His coverage ended with his retirement in 2018. 

“I thought they were a joy to cover,” Glasspiegel said. “Loews bent over backwards to answer questions about operations.” 

A spokesperson for Loews declined to comment for this story.

Right-sizing Valuations  

Beyond Wall Street coverage, Loews stock may be under pressure because it’s led by a second-generation family member; James Tisch, Larry’s son, became CEO in 1999.

“There is a premium to founder-led firms but a discount to the second generation, whether the individuals themselves deserve one,” said Belen Villalonga, a professor at the NYU Stern School of Business.

In contrast, Berkshire Hathaway shares may get a lift due the popularity of founders Buffett and Charlie Munger. 

Of course, company structure and the number of Wall Street analysts covering a firm doesn’t necessarily say anything about its underlying fundamentals, or whether or not investors can find value in holding the stock over the long-term. For example, Loews has consistently grown revenue, spends billions on buybacks and pays stockholders a dividend. 

But the performance of conglomerates and family-owned firms shows that investors do take factors outside of earnings growth into account, meaning that structure and ownership are ultimately important for shareholders. 

There may be a clear path to right-sizing valuations for conglomerates ready to play by Wall Street’s rules. Spinning off or divesting units can boost stock prices, for both the parent company and the newly separate entity, encouraging a wave of firms to slim down. Shares of General Electric and spinoff GE HealthCare have outperformed the S&P 500 since separating in January, up 66% and 44%, respectively.

“Pure plays tend to be more highly valued than these sort of widely diversified firms,” Feldman said.

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