Only Eight Stocks Passed my Old Faithful Screen
Posted: May 02, 2017
In looking for the best stocks to buy, I run a couple of dozen stock screens, but three are my favorites.
They are the Robot Portfolio (which I report on to readers each January), the Bunny Portfolio (with a report each December) and the Old Faithful screen, whose turn comes today.
The Old Faithful series has been one of my most successful. In 14 outings, my selections have beaten the Standard & Poor’s 500 Index 12 times.
The average 12-month return on my Old Faithful selections has been 24.3%, compared to 5.3% for the Standard & Poor’s 500 Index in the same periods. All figures are total returns including dividends.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
The Old Faithful stocks I recommended a year ago advanced 30.1%, versus 18.0% for the S&P 500. Greenbrier Cos. (GBX), a maker of railroad cars, led the parade with a 63% return. Sanmina Corp. (SANM), a contract manufacturer of circuit boards and other electronic products, chipped in 54%. My other three picks had gains, but trailed the index.
Old Faithful Criteria
To make it through the Old Faithful screen, a stock must:
- Be traded in the U.S., with a market value of $250 million or more.
- Sell for no more than 15 times earnings, 2 times book value (corporate net worth per share), and 2 times revenue.
- Have debt less than stockholders’ equity.
- Show earnings growth of 10% a year, on average, the past five years.
- Have a return on equity (a measure of profitability) of 15% or better.
None of the criteria, in isolation, is terribly hard. But to meet all of them is tough. Usually, only about 20 to 30 stocks pass (out of about 4,700 publicly traded U.S. stocks). This year, with the market pricey, only eight passed.
Usually I pick a few stocks to recommend from among those that pass the Old Faithful screen. This year, since there are only eight, I will recommend them all.
The Chosen Eight
AmTrust Financial Services Inc. (AFSI) write workers’ compensation and other property & casualty insurance coverage. It has turned a profit 13 years in a row. The stock sells for less than eight times earnings and yields more than 4% in dividends.
Biglari Holdings Inc. (BH) is an offbeat conglomerate run by Sardar Biglari out of San Antonio, Texas. It owns Steak ‘n Shake and other restaurants, Maxim magazine, and First Guard Insurance. The restaurants provide almost all the revenue, and the company has been profitable in 13 of the past 15 years.
JetBlue Airways Corp. (JBLU) seems to me superior to many competing airlines in scheduling and service. Airlines have done well the past two years, with planes flying full and fuel costs subdued. I got out of my airline stocks in January, but if I were to own one, this one deserves consideration.
NeuStar Inc. (NSR), out of Sterling, Virginia, provides marketing information, telecommunications services (such as caller ID) and cybersecurity services. It has earned better than a 20% return on stockholders’ equity six years running, yet sells for only 11 times earnings.
Four of the eight Old Faithful nominees are from outside the U.S., but trade here.
Magna International Inc. (MGA), based in Aurora, Ontario, Canada, produces auto-parts used by almost every major car manufacturer worldwide. It notched a 21% return on stockholders’ equity last year, scoring high on profitability. The stock sells for a modest eight times earnings.
Net 1 UEPS Technologies Inc. (UEPS) is a payment processor based in South Africa. It does most of its business there and in South Korea. The company’s revenue growth has been outstanding for a decade but has reversed in the past year. This is a high-risk, but I think interesting, pick.
Signet Jewelers Ltd. (SIG) is based in Hamilton, Bermuda. It operates more than 2,000 jewelry stores under several brand names, including Kay, Zales, and Jared the Galleria of Jewelry. Revenue and earnings have been growing at a double-digit pace the past five years, but revenue has slowed lately.
Sinopec Shanghai Petrochemical Co.(SHI) is just what it sounds like – a Chinese chemical company. In the past four years, it has paid off almost all of its debt. Profitability is outstanding, with a return on equity of almost 28% last year.
Disclosure: One of my clients owns Magna International, and one owns Sinopec Shanghai Petrochemical.