Only Red-Hot Companies Can Make My 30-30 Club
Posted: April 11, 2017
The crack of the bat. The smell of the grass. It’s baseball season — time for my annual 30-30 club.
In baseball, a player joins the 30-30 club if he slugs 30 home runs and steals 30 bases in the same season. My 30-30 club is for corporations. To make the roster, a company must post a 30% return on stockholders’ equity, and show a 30% earnings growth rate over the past five years.
This year, 36 companies qualify, including such well-known outfits as Texas Instruments Inc. (TXN), MasterCard Inc. (MA) and Viacom Inc. (VIA).
These companies deserve to be honored. That doesn’t necessarily mean I would buy their stocks. Often, their excellence is well recognized by investors, and the stocks are pricey. Sometimes, debt is too high for my taste.
Batting Average
Almost every year, I single out a few companies on the 30-30 roster that I would buy. My average 12-month gain has been 10.1%, versus 9.2% for the Standard & Poor’s 500 Index.
My selections have bested the S&P 500 seven times and trailed it six times. (This is my 15th column on the subject but I didn’t recommend any of the stocks in 2004.)
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.
NVR
Back for a sixth time on the 30-30 roster is NVR Inc. (NVR), a homebuilder based in Reston, Virginia. It does business under the names NV Homes, Ryan Homes, and some other brands. About half its revenue comes from the areas of Washington D.C. and Baltimore, Maryland.
From time to time, politicians say they will shrink the federal government, sparking fears that growth of the D.C. area will reverse. Yet the government has grown and the D.C. area has boomed. This trend has been kind to NVR, which has averaged 47% earnings growth in the past five years.
Mastercard
Mastercard, on the list for a third time, has shown handsome and steady earnings growth, and spectacular profitability. Its pretax profit margin last year was 52%, and its return on stockholders’ equity was 69%.
Since the stock sells for 30 times earnings, I wouldn’t normally buy it. I’m a cheapskate. But at my investment firm, I have given some authority to pick stocks to two of my associates, and my colleague Tom Macpherson added it to client portfolios. I’ll go along with Tom on this one.
Gilead Sciences
Gilead Sciences Inc. (GILD), a biotech company, makes the list for a second time. I recommended it last year, with disastrous results. But now the stock sells for only six times earnings, with a 3.1% dividend yield. I can’t resist picking it again.
The reason Gilead is cheap is that insurers, state and federal government officials, and pharmacy benefit managers are trying harder these days to save money. So, the days when drug companies could charge what they like are over.
Suppose Gilead’s return on equity, which was 72% last year, got chopped in half. It would still be 36%, which would still be extraordinarily good.
Missing FANGS
Amazingly, none of the so-called FANG stocks – Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (now Alphabet, still symbol GOOG) – made the 30-30 Club this year. None had a return on equity higher than 18%.
Apple Inc. (AAPL), a five-time winner in the past, is profitable enough but its earnings growth the past five years has averaged 12.3%.
Full Roster
Here are the winners that I haven’t mentioned so far. Three-time honorees are CR Bard Inc. (BCR), DST Systems Inc. (DST), Tenneco Inc. (TEN), and United Rentals Inc. (URI).
Two-time winners are Allegiant Travel Co. (ALGT), Sherwin-Williams Co. (SHW), Texas Instruments and Ubiquiti Networks Inc. (UBNT).
Rookies include Altria Group Inc. (MO), Apollo Global Management LLC (APO), Avery Dennison Corp. (AVY), Broadridge Financial Solutions Inc. (BR), Crown Holdings Inc. (CCK), eBay Inc. (EBAY), Equity Residential (EQR), Hanesbrands Inc. (HBI), Huntington Ingalls Industries Inc. (HII), and InterDigital Inc. (IDCC), and John Bean Technologies Corp. (JBT).
More rookies: KLA-Tencor Corp. (KLAC), Lear Corp (LEA), Leggett & Platt Inc. (LEG), Lennox International Inc. (LII), Lowe’s Cos. (LOW), Masimo Corp. (MASI), National Beverage Corp. (FIZZ), Nvidia Corp. (NVDA), Oneok Inc. (OKE), Reynolds American Inc. (RAI), Sinclair Broadcast Group Inc. (SBGI), Tanger Factory Outlet Centers Inc. (SKT), Viacom Inc. (VIAB), and Wyndham Worldwide Corp. (WYN).
Disclosure: I own NVR and Mastercard for almost all of my clients, and personally. Members of my family own Nvidia.