By MARK HULBERT
Apple is now America's most admired company. Investors may therefore want to think twice before investing in it.
Yes you read that right. Believe it or not, stocks of the most admired companies often fail to produce the returns going forward that investors hope and expect.
So this past week's release of Harris Interactive's annual survey of corporate reputations should definitely give investors pause. Apple (AAPL)
Just take the top finisher in last year's Harris Interactive survey: Google (GOOG)
That's just one data point, of course. But it is more the rule than the exception, according to a study conducted several years ago by Deniz Anginer, a financial economist at the World Bank, and Meir Statman, a finance professor at Santa Clara University. (Click here for a copy of their study.)
In their study, the researchers examined the stocks in Fortune magazine's annual list of "America's Most Admired Companies." Though that list is compiled differently than Harris Interactive's survey, the two reflect many of the same underlying factors. And the Fortune survey has the added benefit of more history back to the early 1980s, in fact. Harris Interactive, in contrast, is in only its 13th year.
The researchers constructed two portfolios out of the stocks in the Fortune list. The first contained the stocks of companies that were highest in each year's list (of admired companies), while the second contained those with the lowest Fortune scores (of despised companies).
The portfolio of despised companies outperformed the portfolio of admired firms by nearly two percentage points for the year, on average, between April 1983 and December 2007.
The researchers also found that increases in admiration were, on average, followed by lower returns. This should add to our concern about Apple, since the company's reputation enjoyed a big increase over the last year.
What accounts for this counterintuitive result? I see it as yet another confirmation of contrarian analysis. The time to buy isn't when the news about, and reputation of, a company are all positive, but when to repeat Nathan Rothschild's famous phrase the blood is running in the streets.
Think about it this way: When you invest in a company that is already highly admired, its stock will have already been bid up to higher-than-normal levels because of its being so well thought of call it an Admiration Premium.
Its stock will therefore have to jump over a correspondingly higher hurdle in order to produce a handsome rate of return going forward. At the same time, furthermore, any stock with a high Admiration Premium is particularly vulnerable to anything that detracts from its reputation.
To be sure, the researchers' findings reflect an average across many years, and not every year's most admired companies produced disappointing returns. So it would not be completely unprecedented for Apple to beat the market handily over the next 12 months despite being America's most admired company.
But the historical data do serve as a powerful reminder that, when we invest in companies as admired as Apple is today, the burden of proof is upon us to show that the company can indeed jump over the high hurdle created by its high Admiration Premium.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.