The exciting stocks in your portfolio may not be all they’re cracked up to be as recent research suggests those in more mundane industries may be pulling the weight when it comes to returns.
When all is said and done, stocks in exciting industries, like computer software and pharmaceuticals, have lower returns than banking and utilities stocks, according to a recent working paper from the National Bureau of Economic Research, the same organization that determines when U.S. recessions start and end.
A cursory glance at those outlier sectors, as represented by the S&P 500 Index SPX, -1.34% appears to show that’s the case.
NBER researchers looked at a how much profitability varied between companies in a given industry to determine how salient, or exciting, a given sector was. They found that companies in industries where profitability didn’t vary widely -- the boring ones -- tended to have lower market-to-book ratios and lower valuations than exciting companies.
When the researchers ran an analysis of the respective companies and compared the returns on equity, they found that while the exciting companies had higher valuations, they tended to have lower returns and lower discount rates.
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