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Insights and Thoughts from Dorfman Value Investments

John Dorfman writes a syndicated column that appears weekly in the Omaha World Herald, the Pittsburgh Tribune Review and the web site Guru Focus. In it, he tries to provide original, profitable stock ideas for readers. In contrast to almost all other investment columnists, he systematically reports on past results, both good and bad.

Recent columns are archived here for your convenience.

Sane Portfolio Racks Up a 19% Return

John Dorfman

Score one for sanity.

My “Sane Portfolio” achieved a 19.36% return over the past year (August 9, 2016 through July 28, 2017), beating the Standard & Poor’s 500 Index, which notched a 15.60% return.

I launched the Sane Portfolio in 1999 and have returned to it most years since then. It is intended to be a moderately conservative portfolio.

To be eligible for membership in this portfolio, a stuck must clear seven hurdles. No one of them is terribly hard but few stocks can clear all seven.

Once I choose a stock to join the Sane Portfolio, it stays in unless and until it fails to meet one of the seven tests.

This year, Magna International Inc. (MGA), a Canadian car-parts maker, is making its fourth appearance on the Sane roster. JetBlue Airways Corp. (JBLU) is back for a third time.

Back for their sophomore year are Foot Locker Inc. (FL), Lear Corp. (LEA), and PulteGroup Inc. (PHM).

Eligibility

To be eligible for the Sane Portfolio, a stock must jump seven hurdles:

  • Market value of $1 billion or more.
  • Stock price 18 times earnings or less.
  • Earnings growth averaging at least 5% per year the past five years.
  • Profitability (measured by return on stockholders’ equity) of 10% or better in the latest fiscal year.
  • Stock price 3 times revenue or less.
  • Stock price 3 times book value (corporate net worth) or less.
  • Debt less than stockholders’ equity.

For purposes of determining eligibility, it doesn’t matter whether a stock is up or down in the past 12 months. Some winners are chopped, while others return. The same is true of losers.

Usually only a few dozen stocks pass these tests. I use judgment to select a handful of them for the portfolio.

Seven stocks didn’t make it back this year, including last year’s two biggest winners. The big gain for Lam Research pushed it just above 18 times earnings. Sanderson Farms didn’t quite make the earnings-growth cut.

Performance

In 15 previous outings, the average 12-month return for The Sane Portfolio has been 10.4%, compared to 8.6% for the Standard & Poor’s 500 Index. The portfolio has beaten the index eight times and has been profitable 13 times.

Last year’s good performance owed a lot to a 76% gain in Lam Research Corp., which makes semiconductor equipment. Sanderson Farms Inc. (SAFM), a chicken producer, chipped in a 45% return.

The worst loser was Foot Locker Inc. (FL), which fell nearly 20%. It is back, nevertheless, for a second year because it still passes all seven tests.

Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes.  The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.

New Picks

This year I have seven spots to fill on the Sane roster. I will start with CVS Health Corp., which I think is doing a nice job of rebranding itself as a health-promotion company, not just a drug store.

Next, I will pick Sinopec Shanghai Petrochemical Co. (SHI), a Chinese chemical company that trades in the U.S. and in Hong Kong. The stock looks cheap at 7 times earnings, and offers a dividend yield of more than 6%.

A debt-free choice is Urban Outfitters Inc. (URBN). Like most brick-and-mortar retailers, it is fighting for its life against Internet merchants. But I think it is further along than most in making the Net its friend.

Nearly debt-free is Gentex Corp. (GNTX), which makes self-dimming car mirrors and rear-view cameras. Its revenue has grown steadily in the past five years, and earnings have also (though less steadily) trended upward.

Growing Fast

Growing rapidly, partly through acquisitions, is Centene, a managed-care company that specializes in serving poor and disabled patients, mainly through Medicaid. Revenue may surpass $50 billion next year, up from about $11 billion in 2013.

Tyson Foods Inc. (TSN) has been growing its prepared-food business very rapidly, but its larger businesses of selling beef and chicken have shown almost no growth lately. The company has a good history of profitability, and I think it’s attractive at its recent price of about $63.

Carnival Corp. (CCL), one of the world’s largest cruise-ship operators, has been on a nice growth trajectory lately. Much of the growth is coming from Asia and Australia. Business in the U.S. and Europe is stable but pretty reliable.

Disclosure: I own Lam Research and Sanderson Farms for most of my clients and personally. I own Sinopec Shanghai for one client and Magna International for one client.

 

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