Investing In Small Towns Can Beat Major Indexes

By Will Ashworth | January 14, 2009 AAA

Back in July 2007, the Daily Yonder, a website dedicated to the rural lifestyle, assembled what it coined the "Yonder 40 Stock Index". It consisted of 40 companies whose headquarters were in rural areas or did business in rural areas. As someone fascinated by small towns and the success stories that emanate from these most unlikely of places, my stumbling upon this site a few months ago was a Godsend. It seems that investing in rural America is not only good for the soul, but possibly good for the pocketbook as well.

Outdoes All Major Indexes
The Yonder 40 did better than all three of the Dow Jones Industrial Average, Nasdaq Composite and S&P 500 indexes. Sure, it was down 31.3% in 2008, but the mere fact that rural-based companies can hold their own against those located in the big cities is proof-positive that the rural lifestyle is alive and well. The two best performing stocks on the S&P 500 in 2008 were Family Dollar Stores (NYSE:FDO) and UST (NYSE:UST), up 37% and 27%, respectively. Close behind was Wal-Mart (NYSE:WMT), which finished the year up 16.6%. That's no small feat considering how poorly retail stocks did this past year. (Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks in Cyclical Versus Non-Cyclical Stocks.)

Winners In 2009
Looking down the list of 40 companies, three stocks jump out at me for 2009:
1) Ralcorp Holdings (NYSE:RAH);
2) Tractor Supply (Nasdaq:TSCO); and
3) Monsanto (NYSE:MON).

Ralcorp and Monsanto were down 3% and 37.6%, respectively, while Tractor Supply was up 2.2%, one of only five to do so. One of the winners, UST, became a subsidiary of Altria (NYSE:MO) on January 6. Altria, parent to Phillip Morris, paid $10.4 billion for the smokeless tobacco maker. While Family Dollar and Wal-Mart are both likely to put in a repeat performance in 2009, I thought I'd go with some original ideas.

Three Strong Businesses
Ralcorp, a stock I wrote about last August, appears to have the cereal business covered on both sides of the aisle, producing both lower-cost private label brands for grocery stores as well as name brands like Raisin Bran, Shreddies and Alpha Bits. Whichever way the economy blows in 2009, it'll have the breakfast cereal to meet consumer needs.

As for Tractor Supply, I owned the stock for several years until earnings partially collapsed in 2006; however, the assortment of products it offers to those living the rural lifestyle is hard to find all in one place. It knows how to manage its business in good times and bad.

Lastly is seed-maker Monsanto. It came out with super Q1 earnings of 98 cents a share last week, beating estimates by 39 cents. The company also provided the street with a very positive outlook for the remainder of the year by including full-year earnings per share projections between $4.40 and $4.50. That's pretty good for a stock down 38% year-over-year. (Learn more about forward-looking numbers in Revenue Projections Show Profit Potential and Great Expectations: Forecasting Sales Growth.)

Bottom Line
While the three companies I've highlighted along with the winners from 2008 should provide you with a great place to start looking for stocks to buy, I think you'll find many more on the list that may be to your liking. After all, as a group, they did outperform all the major indexes in 2008. Who says you can't make money in small towns? Not me, that's for sure.

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