Perfect 10 Portfolio
Posted: July 11, 2017
Before you hit the beach, you might want to take a look at my Perfect 10 Portfolio.
No, it isn’t a collection of supermodel photos. It’s a collection of ten stocks, each of which sells for 10 times earnings.
Over many years, stocks have usually sold for about 15 times earnings. Currently, the average multiple is about 25. Stocks selling at 10 times earnings are unpopular stocks that sell at a discount to the overall market.
To illustrate my belief that the road to stock market riches is to buy unpopular stocks, not popular ones, I started my Perfect 10 Portfolio in this column back in July 2000. I’ve run it every July since, except in 2007-2009 when I had temporarily retired as a columnist.
The 14 Perfect 10 Portfolios to date have produced pretty results, even though investors didn’t consider the stocks pretty at the time. The average one-year return has been 19.3% compared to 9.1% for the Standard & Poor’s 500 Index.
Eleven of my 14 Perfect 10 lists have been profitable, and nine have beaten the index.
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.
Last year’s Perfect Ten list achieved a return of 20.9%, compared to 15.1% for the S&P 500. SLM Corp. (SLM), a student loan company, led the list with a 63.9% return. Marathon Petroleum Corp. (MPC) and Everest Re Group Ltd. (RE) both had returns will north of 40%.
The worst performer was Hollysys Automation Technologies Ltd. (HOLI), a Chinese factory-automation company, which dropped close to 11%.
Here are the ten new members of the Perfect 10 Portfolio.
Lear Corp. (LEA), a maker of seats and electrical systems for cars, was on the list last year and posted a 34% return. It’s back, still selling for 10 times earnings because the earnings and stock price rose in tandem. The stock has tripled since 2011 but I think there are still some gains left in it.
Lincoln National Corp. (LNC), a life and health insurer, is the largest company on the list this year. It faces uncertainty about the rules of the game for health care, but analysts expect it to post rising earnings this year and next.
Taro Pharmaceutical Industries Ltd. (TARO) is an Israeli company that makes both generic and proprietary drugs. Dermatological ointments are some of its main products. It has shown profits in 14 of the past 15 years.
Three clothing retailers are on the list this year. One is American Eagle Outfitters Inc. (AEO), which has shown rising revenue and earning the past two years. Analysts think revenue will rise again in 2018, but they expect earnings to tail off.
However, the great thing about stocks selling for 10 times earnings (or less) is that they have low expectations built into them. If results are better than expected, even if not great, the stock will rise.
Like American Eagle, Urban Outfitters Inc. (URBN) targets young adults and older teenagers. It is further along than many brick-and-mortar retailers in mastering the art of selling on the Internet.
Debt-free is Francesca’s Holdings Corp. (FRAN), a Houston-based retailer that sells clothing, jewelry and accessories for women 18-35. Here, analysts expect rising revenue and flattish earnings in 2018.
Clearly in some trouble is Waddell & Reed Financial Inc. (WDR), a money management firm in Overland, Kansas. Hurt by the trend to index investing, the company has seen two years of revenue decline. Analysts think 2017 and 2018 will be worse. But the company has turned a profit for 15 years in a row.
Stoneridge Inc. (SRI), based in Warren, Ohio, makes electrical and electronic parts and assemblies for cars and trucks. The company has been losing market share, but the stock’s conservative valuation may compensate sufficiently for that.
Oil tankers are a struggling industry. DHT Holdings Inc. (DHT), based in Hamilton, Bermuda, owns 32 oil tankers. It is expected to earn only 19 cents a share this year, down from $1.05 last year. Partial recovery is expected in 2018.
I’ll conclude this year’s Perfect 10 Portfolio with my most speculative choice, China Distance Education (DL). The Beijing company offers test preparation courses, many of them online. Big U.S. holders include Wellington Management and Alliance Bernstein.
Disclosure: For one of more of my firm’s clients, I own shares in American Eagle, Taro Pharmaceutical, and Waddell & Reed.