Peter Lynch, one of the most successful investors of all time, had an investment principle that served him well over the years: Buy what you know.
In an island state like Hawaii, which has only 15 publicly traded companies with a market capitalization of at least $1 million, it’s easy for local investors to be well versed in the homegrown firms.
But buying local also has a downside. Investors can get too attached to local stocks and end up with a portfolio that lacks diversity.
If you had invested in Hawaii stocks in June 2009, the month that marked the end of the 18-month Great Recession, chances are you would not have done as well as if you had invested in one of the major stock indexes.
The stock market overall has been on an upward trajectory since June 2009, with the Nasdaq composite index rising 67.7 percent, the Dow Jones industrials average increasing 57.2 percent and the broader Standard & Poor’s 500 index rising 54.3 percent.
Only four Hawaii-based companies have been able to match or exceed those returns during that period. (For the purpose of this article, all the percentage returns exclude dividends, which would boost a stock’s performance.)
The best-performing stock since the recession ended is Kona-based Cyanotech Corp., a producer of human nutritional products from microalgae. Its stock has rise 191.1 percent since that time but so far this year is down 17.4 percent.
Territorial Bancorp Inc., which converted from a mutual holding company to a publicly traded corporation on July 13, 2009, is second with a gain of 136.2 percent, including a 19.6 percent gain this year. It is the parent of Territorial Savings Bank, the fifth-largest bank in the state.
Third on the list is Alexander & Baldwin Co., which gained 127.2 percent from the end of the recession until spinning off ocean shipper Matson Navigation at the end of the second quarter. A&B and Matson began trading as separate firms on July 2.
"Knowing a company or its products or services is only the tip of the investment process," said Barry Hyman, private client group vice president for the Maui branch of FIM Group Ltd. "In addition to knowing — and liking — the product or service that a company sells, it is also critical for investors to delve into and understand the company’s finances, valuation, competitive forces, etc. Most individual investors are not equipped to do such analysis. That is why it is advisable for investors to hire professionals to manage their serious assets."
Still, local knowledge can be helpful in certain situations. Hyman citied the credit crisis of 2007-2009 that crushed stocks of global banks with high exposure to mortgage securities. He said their balance sheets were so overly leveraged that they were technically bankrupted when mortgage derivative asset values fell.
"When those stocks fell, the entire banking sector followed with stocks of all banks getting sucked into the mess," Hyman said. "Investors who knew management of Bank of Hawaii might have been able to hypothesize that Bankoh would likely not go in for such risky investments nor use such reckless leverage. That gut feeling, having a local understanding of the culture of that bank, could have been a benefit to investors, leading them to take advantage of the sympathy crash in Bankoh’s stock price by buying shares at depressed prices. A mainland investor might not understand the culture and nuances as well as a local investor who is familiar with the people and management of a Hawaii company like BOH."
Among other Hawaii companies that have posted gains since the end of the recession, or since they began trading after that date, are ML Macadamia Orchards LP (up 54.8 percent), Hawaiian Electric Industries Inc. (up 44.1 percent), Bank of Hawaii Corp. (up 31.5 percent), the post-spinoff Alexander & Baldwin (up 19.5 percent) and Hawaiian Holdings Inc., parent of Hawaiian Airlines (up 2.8 percent).
Some of Hawaii’s companies weren’t trading in their current form when the recession ended. Matson, which began trading on its own on July 2, has since fallen 2.9 percent. Hawaiian Telcom, which began trading publicly on Dec. 21, 2010, after emerging from bankruptcy on Oct. 28 of that year, is off 3 percent since its debut but up 14.9 percent this year. Also with negative returns: Barnwell Industries Inc. (down 22.3 percent), Maui Land & Pineapple Co. (down 52.8 percent), Central Pacific Financial Corp. (down 69.8 percent), Mera Pharmaceuticals Inc. (down 70 percent), Pacific Office Properties (down 95.2 percent) and Hoku Corp. (down 96.9 percent).
While it might be tempting to buy Hawaii-based stocks, Honolulu financial adviser Alan Matsuda argues against owning local stocks, or any individual stocks for that matter.
"Don’t do it, because whenever you get into investing in individual stocks, you tend to fall in love with what you pick," he said. "It’s a dangerous thing. I would recommend against doing that."
Matsuda, who is a certified financial planner and registered investment adviser, recommends individuals use professional managers who invest in mutual funds and exchange-traded funds.
"What happens if you get into individual stocks or if you get into Hawaii companies, you’re emotionally involved," Matsuda said. "It’s like a moth to the flame."
Still, there may be advantages for those in Hawaii who want to invest in local stocks.
"A local investor is in the position to look at a company and its prospects over time, and can invest long before an event happens," said Richard Dole, CEO of Honolulu investment bank Dole Capital LLC. "However, this strategy requires patience. Many investors won’t pay much attention to a stock until it starts moving up, and by the time they invest, they have missed much of the upside."
Dole said investors need to make sure they remain diversified and not concentrate an investment portfolio with Hawaii stocks.
"Hawaii stocks are attractive from time to time but are not generally actively traded," he said. "This makes them potentially more volatile than many mainland and international stocks."
Dole said there are several things to consider when buying local.
"Hawaii stocks cover the risk spectrum, although none are without risk," Dole said. "Hawaiian Electric is relatively conservative with regulated rates set by target rates of return. Cyanotech is not for the faint of heart, nor is Hawaiian Airlines with it’s high fixed costs. A&B has already restructured, and it’s hard to tell how the market will view a stand-alone real estate company with good long-term potential from the development of its real estate, but limited near-term earnings. Territorial has more than adequate capital, but its return on capital has lagged. There are a lot of options open to this company. With its strong capital base, the company is in the position to wait for the best alternative."
Hyman said he likes to give the example of Facebook, which is popular among the masses but has been a bust as a stock.
"Virtually everyone knew who or what Facebook was prior to its IPO at $38 a share in May," Hyman said. "Its great success, incredible growth rate and phenomenal number of users globally were well understood. So to the average investor it seemed like a great investment opportunity.
"But to investors who analyzed Facebook’s finances, the $38-per-share price of the stock was astronomical compared to the company’s revenues, earnings, cash flow per share as well as to the estimated levels of those metrics over the next five years. Those more knowledgeable investors steered clear of Facebook shares at that initial price. The stock has since fallen 50 percent and reached another new low Friday (of $19.05)."
Added Hyman, "Moral of the story is just because you are familiar with or like a company, you should not invest in its stock unless you have done the diligent work to determine that its price is less than its intrinsic value."
