Stealth stocks

Academic studies that have aged better than Mr Gray's painting suggest that defensive stocks - those shares that are expected to perform better in economic downturns than in upturns - outperform, on average, over the longer term. One of the reasons usually given is that investors tend to underprice dull stocks, partly due to their overestimation of the growth that exciting new companies can provide. So which are the stocks flying under the radar?

Consider 'boring Bunzl (BNZL)', as the supplier of hotel napkins and safety helmets is sometimes called in the finance pages. Certainly, no one should be sniffing at its performance. Plodding along, it has strongly outperformed the FTSE 100 over the past one, five and 10 years. Food packaging and disposable tableware may not make for the most exhilarating analyst presentation: but specialising in the things that consumers need, but do not necessarily notice, has been good business.

Still, any investor can decide between the stocks they think are exciting and those they think dull and likely to be overlooked. Rather than simply picking stocks that we think get the least attention, we propose a system for identifying those that are currently attracting the smallest social and research 'buzz'.

How our system works

The first data set comes from real-time information platform trading.co.uk, which looked at the number of social media mentions for each of the FTSE 350 companies between 1 January and 19 April 2016. The trading.co.uk algorithm only pulls out 'relevant' mentions: over time, it learns to distinguish between discussion of a company's profit warning and mentions of a company's products. We ascribed to each stock a social media score on the basis of the total number of mentions during this period: the higher the score, the greater the number of relevant mentions.

To this, we added in the number of research houses covering the stock, using April data from S&P Capital IQ, to provide a measure for analyst attention. We also converted this into a score: again, the higher the score, the more research houses covering a company's equity.

This allowed us to come up with a combined score for the social media and analyst 'noise' around a stock. We present the 10 with the smallest score, under our definition the most overlooked on each of the FTSE 100 and FTSE 250. Hopefully, this split is useful given that larger companies understandably score higher on the research score, at least. We have also looked at the 'loudest' stocks in the FTSE 250.

We have excluded companies that have left the market, or that have listed within the past three years, in order to get a sense of the longer-term stealth stocks rather than the quieter newbies: this screening only had an impact on the FTSE 250 selection. Finally, we took out investment trusts (apart from real-estate investment trusts), which unsurprisingly fill the bottom of the table when it comes to social media and analyst coverage.

Buying boring on the FTSE 100

It is, for most people, hard to get excited about packaging. Mondi (MNDI) is the classic example of a company that gets less attention than its size would suggest: at the time of writing, it was ranked 62nd in the FTSE 100 by market capitalisation, and yet currently it is the 99th when it comes to attention-grabbing.

Listed in Johannesburg and London, Mondi sells more than 100 products across 30 countries, with the largest chunks of its revenue coming from packaging paper and fibre packaging, such as corrugated boxes. Since it listed in mid-2007, the company has managed compound annual growth in earnings per share of 20 per cent. So it is of little surprise that its share price has almost trebled, against a flat FTSE All-Share over that period.

The IC has long been a fan of the stock, tipping it in October 2012 at 651p and in September 2015 at 1,469p. Both times we stressed management's ability to target the right markets and to invest wisely in acquisitions to grow its market share. Despite a sell-off at the beginning of this year on concerns over its Russia exposure, the rise of e-commerce and the company's investment in its consumer packaging division bode well for further growth.

FTSE 100 overlooked shares

Also not likely to enliven dinner party conversation is outsourcing giant Babcock (BAB), which provides a range of support services, most notably marine and defence contracts. These range from military training and equipment support to the handling of liquid petroleum gas. "Boringly predictable" was a fitting phrase used in 2013 by chief executive Peter Rogers, who is due to resign in August after 13 years at the company, to describe the company's performance. The company’s stock is not quite at the heights it reached in 2014, but still demonstrates strong capital growth over the past five years, and has far outstripped the FTSE All-Share over the past 10 years.

Mr Rogers leaves behind a strong franchise, which again the IC has tipped twice within recent memory. We said buy at 1,189p in October 2013 and had another go at 1,100p in May 2015. Babcock's services have a high barrier to entry, its revenues have strong visibility, and it should benefit from a renewed government openness to spend on defence in an increasingly unstable Europe and Middle East. In March this year, the Ministry of Defence awarded the company a contract to maintain the software on Hawk fighters used by the Royal Air Force and Royal Navy to train fighter pilots.

Barely talked about at all (by us included) is Coca-Cola HBC (CCH), a bottling partner of the homonymous US drinks maker. The Coca-Cola Company (NYSE:KO) itself owns 23.5 per cent of the shares, as does a private group linked to the original family. Coca-Cola HBC moved from Athens to a main listing in London in 2013, and moved its headquarters to Switzerland, but has largely kept out of the limelight.

It comes as some surprise that a few of the listed housebuilders get dragged into this list, doing badly on both the number of research houses covering them and the mentions on social media, despite their popularity with our audience. Also, you'll notice an extra column in the above table, which is the amount of social media 'pulses' that the stocks received on trading.co.uk over the period. These are sent out to the platform's users when there is a lot of media attention, positive or negative, towards a stock. Underlining the quiet nature of the shares that have come out in the FTSE 100 screen, most of them were not subject to any pulses over the period tracked.

Smaller stealth stocks

No one wants to talk about death, and so it seems not many want to talk about funeral provider Dignity (DTY). "Nobody knows what's going to happen to anybody, besides the forlorn rags of growing old," wrote US author Jack Kerouac at the end of On The Road, and Dignity has made good business out of servicing the one sure thing. But perhaps because there are only so many times editors and tweeters want to read the phrase 'death rate', it does not get much attention in news and social media.

Most overlooked FTSE 250 stocks

It turns out that 2015 saw an unprecedented increase in deaths and based on longer-term data management predicts fewer in 2016, leading to lower pre-tax profits. But if it cannot determine the major factor determining its input, the company has managed well what is within its control. In 2015, Dignity expanded by acquiring 36 locations from Laurel Funerals, but it also continued to invest in its core locations to keep customer standards high, and maintain its stated investment case of a "stable, predictable, cash-generative business". But the expected dip in adjusted full-year earnings means the stock is trading on a historically high 22 times consensus expected earnings.

Elsewhere, readers who followed the advice of our small-cap stockpicker Simon Thompson will have done well out of Daejan Holdings (DJAN), a property company with commercial and residential assets in the UK and US. The company does not actively engage with the press, and its latest results statement has fewer than 400 words of commentary before the financials: so it comes as little surprise that it was mentioned just 16 times across social media during the period tracked.

In fact, the company has a fascinating history: the current directors are sons of Polish emigrant Osias Freshwater, who narrowly escaped the Holocaust on the last ship out of Danzig before the outbreak of the second world war. The Freshwater family control the majority of share capital, another reason for the lack of interest and the discount to book value. But the company's exposure to residential property in London and the south-east saw its equity shareholders' funds per share march from £64 in September 2013, to £76 a year later, and on to £85 at September 2015. So even with the discount, those investors that made it in have seen the share price dragged higher.

Another stock unlikely to blow your socks off is building materials maker Marshalls (MSLH). Unless, that is, you had invested in it over the past few years, as a revival of infrastructure spending boosted sales for this manufacturer of 'hard landscaping', such as paving and street furniture. The operational gearing in the business model and industry forecasts for annual construction output growth of around 4 per cent until 2019 bode well.

Finding 'buzz' stocks

How about taking the exact opposite approach, and looking for those stocks that are getting the most attention right now? Below are the FTSE 250 stocks that received the most analyst and social media attention over the same time period. These will come as little surprise, given the news headlines that have swirled around these companies in 2016: the 18 pulse alerts and leading social media score of takeover target Home Retail Group (HOME) speak for themselves.

The 'loudest' stocks on the FTSE 250

But since not all attention is good attention, obviously you would want more information than this to make an investment decision. "The real trick is to look for abnormal traffic," says Gareth Mann, chief executive at trading.co.uk. That is at the heart of the company's algorithm, which looks for abnormal chatter around a stock, measures the positive or negative content, and weights the information based on the influence that its source has on the market.

Its platform can process 22bn pieces of information a day, and when it tracks abnormal data it fires out an alert to readers with links to the news content. "The earlier you can get some information, the longer you have to make an informed decision," says Mr Mann. The company has calculated that a social media pulse above a set level will equate to a price volatility that is 16 per cent higher than average.

But what if you do not want to make the snap evaluation of the newsflow yourself, and neither do you want to pay for a portfolio manager? 'Social investment' provides one answer. eToro is an example of a contracts for difference (CFD) trading platform that allows its users to copy the trades and allocation of their preferred investors on the platform. The user allocates a portion of their pot to a certain investor, and that portion will exactly follow the latter's decisions: for each 'popular investor' you can see the amount of people copying their strategy, as well as their live allocation and their absolute performance.

eToro's chief executive, Yoni Assia, says the social shift in investment is here to stay. "We will see more and more social trading platforms out there, and we will see people using more social data," he says. Mr Assia portrays a new generation of investors reticent to pay to delegate their decisions to portfolio managers, but keen to make use of the real-time and social data at their fingertips to construct a smart portfolio.

Such platforms will surely proliferate and develop as investors become more comfortable with real-time data and online trading tools. But to go with the flow you need to be comfortable that there is real wisdom in the crowds. If unconvinced, you may be better off looking for the stealth stocks that escape the attention of the herd, and that fit in with your stated investment strategy: value, momentum or otherwise. Boring may be undervalued, but that is not to say that boring stocks are always cheap.

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