Historically, family-owned stocks have outperformed the market. And it makes some sense why that’s the case — and why those controlled companies might be stocks to buy.
Family-owned companies generally have direct board oversight from family members. They’re less likely to take unwise risks, and by definition they’re more likely to have skin in the game. If an independent CEO is being compensated for share price gains, a major merger might seem a worthy gamble. If three of the board members are risking their family’s legacy on that deal, however, it might look very different.
As Credit Suisse (NYSE:CS) pointed out last year, family-owned companies outperform the market by a whopping 400 bps annually. The outperformance comes across sectors and company sizes. These five companies, too, represent a cross-section of the market. But all five look like stocks to buy.
Brown-Forman (BF.A) (BF.B)
Distiller Brown-Forman (NYSE:BF.A,BF.B) is best known for its Jack Daniel’s whiskey. But like other liquor plays like Diageo (NYSE:DEO), BF stock has been an attractive investment for some time now. The company has raised its dividend for 34 consecutive years. And after a few years of relatively stagnant growth, Brown-Forman has shown much stronger performance of late.
New offerings like Jack Daniel’s Tennessee Honey are driving sales. A move to premium whiskey — including Gentleman Jack and Woodford Reserve — has been a winner as well. Revenue growth has accelerated to 6% in fiscal 2018 (on a constant currency basis) and should rise 4%+ this year, with the company projecting 11-18% EPS growth.
Meanwhile, BF.A stock has become much cheaper in the market selloff of late, currently trading at a 10-month low. There are some near-term concerns about tariffs, which led FY19 EPS guidance to be pulled down. But those concerns should fade, and long-term investors should ride out any volatility by picking up Brown-Forman on the dip.
Adams Resources & Energy (AE)
Adams Resources & Energy (NYSE:AE) admittedly is a bit of a weird stock. The company’s primary Marketing business moves crude oil from the wellhead to end users, while a smaller transportation business trucks petrochemicals and other products through Texas and beyond.
The controlling Adams family has a bigger asset: the NFL’s Tennessee Titans (formerly the Houston Oilers). And it’s looked at times like Adams Resources has been forgotten. AE has a rising amount of cash — nearly $30 per share, against a current price of $41. Yet the dividend has been held steady, leaving that cash relatively dormant.
Still, there’s an intriguing bull case here, one reason I own the stock. Both the cash and a book value of $36 provide significant downside protection. A rebound in shale oil production and concerns about pipeline capacity could open new business for Adams. The company did acquire a trucking operation recently, perhaps signaling more aggressive capital allocation going forward. And a sale could be in the works at some point to a larger company. AE will require patience — but I still believe at some point that patience will pay off.
Even as a retail bear, I’m intrigued by Nordstrom (NYSE:JWN). The high-end retailer seems to have the most differentiated model in the department store space. It’s a brand notably different from that of a JCPenney (NYSE:JCP) or even a Macy’s (NYSE:M). As InvestorPlace’s Dana Blankenhorn pointed out in August, the company is aggressively reinventing itself as customers dress down — and succeeding in the process.
JWN is more expensive than those peers, but the premium is deserved. And the founding Nordstrom family remains on top of the story. It even tried to take JWN private at $50 — an offer the board refused.
With the stock now at $60, any weakness could see the family make another move, perhaps protecting the downside. In the meantime, investors own a well-run high-end business with a 2.4% dividend yield. That’s an attractive combination — particularly for retail bulls.
John B. Sanfilippo & Son (JBSS)
There are few, if any, public companies with tighter family control than nut processor and manufacturer John B. Sanfilippo & Sons (NASDAQ:JBSS). The founding family owns 89% of the non-traded Class A shares, giving it firm control from a voting standpoint. Members of the Sanfilippo family — including in-laws — comprise the majority of the board and upper management.
It might seem like there’s a risk that nepotism simply goes wild, but it’s actually been a hugely successful strategy for JBSS shareholders. The stock has moved from the single-digits as recently as the beginning of 2012 to a current price just under $70. Consistent special dividends mean that many long-time shareholders now own the stock for free — or even at a negative cost basis.
And returns should continue. The big gains have been driven by a shift toward manufacturing (the company owns the Fisher brand) instead of simply being a middleman in an industry with volatile pricing. That shift still has to play out. Newer brands like Orchard Valley Harvest capitalize on the “good for you” trend. JBSS trades at a discount to most snack companies — but its growth is better. A 14% pullback from August highs sets up a nice entry point as well.
Clearly, this is a management team worth betting on. When it comes to family-owned stocks, few have done it better than the Sanfilippos over the past few years.
Family-Owned Stocks to Buy: Estee Lauder (EL)
Estee Lauder (NYSE:EL) is one of the premier brands in the world. And like BF.A and BF.B, the market sell-off has moved it to an attractive, if still seemingly expensive, price.
EL briefly touched a 2018 low during this week’s market volatility, and still sits 19% below June highs. At 24x+ forward earnings, the valuation still looks high. But this is a company still steadily growing earnings double-digits, with room for expansion in developing markets (notably Asia) and market share gains in the U.S. and the U.K.
As a result, EL stock — like Estee Lauder cosmetics — is a classic case of paying up for quality. It’s not likely to be a decision that investors regret.
As of this writing, Vince Martin is long shares of Adams Resources & Energy. He has no positions in any other securities mentioned.