Boring Stocks That Print Money - Service Corp, La Quinta, and Lynch Lessons

A company that buries people. A budget motel chain nobody heard of. A telephone monopoly forced to break apart. A gourmet sandwich shop that expanded too fast. An airline held together with debt and duct tape.

Five investments. Three massive winners, two spectacular failures. The winners were too boring for Wall Street to notice until the money had already been made. The failures had something in common too: enthusiasm replaced analysis.

Service Corporation International – The McBurial That Became a Twenty-Bagger

If there is anything Wall Street likes to ignore more than toxic waste, it is death. Service Corporation International built an empire on exactly that indifference.

SCI was a Houston company rolling up local funeral homes from mom-and-pop owners. Same strategy as a newspaper chain buying small-town papers. McDonald’s of burials – targeting active parlors doing a dozen or more funerals per week, skipping tiny operations where economics did not make sense.

At its peak: 461 funeral parlors, 121 cemeteries, 76 flower shops, 21 manufacturing centers, 3 casket distribution centers. Full vertical integration.

The real genius was the pre-need policy – a layaway plan for your own funeral. You pay today’s price, lock it in, your family never worries about it later. Even if costs triple by the time you need the service, you are covered at the old rate. Great deal for the customer. Even better deal for the company.

SCI collected pre-need money immediately and invested it. Fifty million per year in policy sales compounds into billions by the time all those funerals happen. Pre-arranged sales growing at forty percent per year. A float machine that would make an insurance executive jealous.

Then came the unexpected kicker. American General wanted to buy real estate under one of SCI’s Houston locations. Instead of paying cash, American General returned its entire twenty percent stake in SCI back to the company. SCI retrieved twenty percent of its own shares for free – and kept operating the funeral home at the old location for two more years. Management that negotiates deals like that has shareholders’ interests burned into their DNA.

Despite this track record, executives had to go on roadshows begging professional investors to listen. Boring name. Depressing industry. No analyst wanted to write about caskets at their desk. Amateurs who paid attention could buy a proven winner with solid earnings growth, almost no debt, at prices far below what hot stocks commanded.

SCI became a twenty-bagger before Wall Street gave it full attention. Predictably, once institutions owned over fifty percent and analysts started covering it, the stock underperformed. The easy money was made during the years when nobody wanted to hear about funeral homes.

Baby Bells – The Spin-Off That Beat Almost Everyone

When the government broke up AT&T’s monopoly, it created seven regional companies: Ameritech, Bell Atlantic, BellSouth, Nynex, Pacific Telesis, Southwestern Bell, and US West. Parent company was uninspiring afterward. But the spin-offs? Average stock gain of 114 percent from November 1983 to October 1988. Include dividends and total return was closer to 170 percent. That beats the market twice over and outperformed most professional fund managers.

Why did they do so well? Once liberated, each regional company could increase earnings, cut costs, keep higher profits. They got all local telephone business, the yellow pages, and fifty cents on every long-distance dollar generated by AT&T. Already through heavy equipment spending, so no need to dilute shareholders. Seven Baby Bells started competing with each other and with Ma Bell, who was meanwhile losing her grip on leased equipment and facing Sprint and MCI.

The information was available to everyone. Pounds of material sent to nearly three million AT&T shareholders explaining the plans. A million employees could see what was happening. The smart move: sell the parent, keep the Baby Bells, buy more shares. Most people did not bother reading the paperwork. Those who did earned returns that embarrassed professional money managers.

Spin-offs work because institutions dump shares they did not ask for, analysts do not cover them yet, and management finally has something to prove. The pattern repeats across decades.

La Quinta Motor Inns – Budget Luxury and an Eleven-Bagger

This one started with a phone call. While researching motels, a conversation with a competitor executive at United Inns produced an unexpected admission: “La Quinta Motor Inns – they are doing a great job. They are killing us in Houston and Dallas.”

When a competitor admits admiration for a rival, something real is happening. Ninety-five percent of the time, executives trash the competition and it means nothing. Begrudging respect from a rival is the most bullish signal you can find.

La Quinta’s concept was elegant. Rooms identical to Holiday Inn quality – same size, firm beds, nice bathrooms, pool – but thirty percent cheaper. How? They eliminated everything that did not contribute to profits: wedding areas, conference rooms, kitchens, restaurants. Put a Denny’s next door instead. Someone else worries about food. Hotels lose money on restaurants anyway, and restaurants generate ninety-five percent of complaints. La Quinta avoided both the cost and the headache.

Fascinating rule in the hotel business: customers pay roughly one one-thousandth of a room’s construction cost per night. Plaza Hotel room costs $400,000 to build, you pay $400 per night. La Quinta rooms cost thirty percent less to build, so thirty percent lower prices with same profit margins.

Target customer: the small businessman who did not want a budget motel but refused to overpay for Holiday Inn. La Quinta built near business districts, hospitals, and industrial complexes – not highway exit ramps. Business travelers book in advance, giving predictable occupancy.

Financing was clever. Instead of bank debt, La Quinta partnered with major insurance companies who provided financing at favorable terms for a small profit share. As partners in success or failure, insurers would never make aggressive loan demands during a downturn. Rapid growth in a capital-intensive business without the debt burden that kills hotel companies.

By the time of the investment, La Quinta had four or five years of proven operations across multiple locations. Growing at fifty percent per year. Stock at ten times earnings. Three brokerage firms covering it. Less than twenty percent institutional ownership. A due-diligence trip to three different La Quintas confirmed quality matched the pitch.

Result: eleven-bagger over ten years.

What Failures Teach Us

Winners are great stories. But failures teach you how to keep the money you have made.

J. Bildner and Sons – Great Sandwiches, Terrible Investment

Bildner’s was a specialty food store in Boston selling gourmet sandwiches and prepared meals. Perfect niche: white-collar workers too tired to cook but too proud for microwave plastic-wrapped meals. The original store was clean, efficient, packed with customers, and incredibly profitable. A yuppie 7-Eleven.

Company went public at thirteen dollars to fund national expansion. No excessive debt. Leasing instead of buying real estate. Everything looked right.

Then reality hit. Two outlets in Boston department stores flopped. Three Manhattan locations got killed by the delis. Expansion to Atlanta before proving the concept worked outside Boston. Multiple simultaneous failures instead of cautious one-at-a-time testing. IPO proceeds burned faster than mistakes could be absorbed.

Stock bottomed at twelve and a half cents. Bankruptcy followed.

The fatal flaw: nobody asked whether the concept worked outside its original neighborhood. Successful cloning is what turns a local taco joint into Taco Bell. No point investing until the company proves cloning works in a different market. If the prototype is in Texas, wait until it works in Illinois.

It is never too late to not invest in an unproven enterprise.

Texas Air – Debt, Airlines, and Complacency

Texas Air was an airline holding company. Small position at twelve dollars, watched it crash to under five when subsidiary Continental filed for bankruptcy. Then Continental cut costs, won back customers, emerged from the grave. Both stocks tripled. Texas Air acquired Eastern Airlines. Stock tripled again to fifty-one dollars. Ten-bagger from the bottom.

Complacency replaced analysis. Instead of selling, more shares purchased at forty-eight dollars. Balance sheet was horrifying – total debt across all airlines probably exceeded that of several developing countries. Yet enthusiasm about projected fifteen-dollar earnings overrode daily warning signs: lost bags, botched schedules, angry customers, bitter labor disputes at Eastern.

The plan was to cut $400 million from Eastern’s costs. But it had not happened yet. Labor contract had not expired. Both sides at loggerheads. Stock fell to seventeen, then nine dollars. Meanwhile, Delta Airlines – Eastern’s main competitor and biggest beneficiary of its problems – was the obvious winning play that got ignored.

Two lessons. Cyclical companies loaded with debt are ticking bombs – business downturns happen, but debt payments never take a vacation. And never become complacent with winners. Rising price with deteriorating fundamentals is a reason to sell, not buy more.

Key Takeaways

Boring and depressing businesses are your friends. Funeral homes, budget motels, regional phone companies. The less exciting a business sounds, the less institutional attention it gets, and the cheaper its stock trades relative to actual earnings power. SCI was a twenty-bagger precisely because nobody wanted to talk about burials at investment conferences.

Spin-offs deserve automatic attention. When a large company breaks apart, pieces often outperform the parent. Institutions dump shares they did not ask for. Management has something to prove. Baby Bells returned 170 percent including dividends while most mutual funds trailed behind.

Verify the concept before investing in expansion. La Quinta had years of proven operations across multiple locations before the investment was made. Bildner’s had one great store and a plan. The difference between an eleven-bagger and a ninety-nine-percent loss came down to one question: does this actually work somewhere else?

Debt kills in cyclical industries. Texas Air had massive debt in an industry famous for bankruptcies. When the cycle turns down – and it always does – revenue drops but debt payments do not. Avoid leveraged companies in volatile industries.

Never confuse a rising stock price with improving fundamentals. Texas Air went from five to fifty-one dollars. That rising price became the reason to buy more, even as operations deteriorated. Price follows fundamentals eventually. When the two diverge, trust the fundamentals. Complacency with winners is how you give back everything you earned.

Do the homework. Verify the business works. Check the balance sheet. Buy when Wall Street is bored or disgusted. And never let a rising stock price substitute for actual analysis of what is happening inside the business.