Why Number Two in an Industry Can Be a Better Stock: Second-Biggest Isn’t Always Second-Best

It’s tough to stay top dog forever. That’s one reason why SmartMoney Magazine, in its swan song, says it’s a good idea to buy number two, meaning the company that’s runner-up in its industry. These companies tend to be cheaper, grow more, and they’re nimble, goes the argument.

Besides, remember when Apple (AAPL) was second-fiddle to Microsoft (MSFT)?

AAPL Market Cap Chart

AAPL Market Cap data by YCharts

In fact, when we look at the charts of some of the second-fiddle companies mentioned in the story, we find they are not necessarily cheaper -- at least, not anymore. In a lot of cases they’re more expensive, but they may be worth the price anyway.

For example, Progressive (PGR) is more expensive than Allstate (ALL) by PE ratio

PGR Return on Invested Capital Chart

PGR Return on Invested Capital data by YCharts

… but has higher return on invested capital.

PGR PE Ratio Chart

PGR PE Ratio data by YCharts

You’ll pay a tad more for Kimberly Clark (KMB) earnings over those of Procter & Gamble (PG) …

KMB PE Ratio Chart

KMB PE Ratio data by YCharts

…but you’ll get far better ROIC.

KMB Return on Invested Capital Chart

KMB Return on Invested Capital data by YCharts

To be sure, Chevron’s (CVX) earnings come cheaper than Exxon's (XOM) based on PE ratio

CVX PE Ratio Chart

CVX PE Ratio data by YCharts

… but it has better operating margins.

CVX Operating Margin TTM Chart

CVX Operating Margin TTM data by YCharts

Moral of the story: Don’t count out number two.

From the editors of YCharts.YCharts Pro Investor Service includes professional stock charts, stock ratings and portfolio strategies.

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