Month: July 2021
The Market’s Expensive, But Some Stocks Aren’t
Posted: July 29, 2021
July 26, 2021 (Maple Hill Syndicate) –- Clients and prospects often say to me, “With the market at all-time highs, isn’t this a bad time to invest?”
They are worrying about the wrong thing.
If you don’t invest when the market is at an all-time high, you will miss some excellent returns.
A study by J.P. Morgan illustrates the point. One year after the market hits an all-time high, the average total return is 14.6%. That compares to 11.7% if you invest on any random day.
Go out three years and the picture is similar. The average three-year return is 50.4%. Investing on any random day gives a three-year return of 39.1%.
Over five years, the difference isn’t quite as dramatic but still favors investing at all-time highs. The study covered more than 32 years, from the beginning of 1988 through August 27, 2020.
Genuine Worry
If investors shouldn’t worry about all-time highs, what should they worry about? The stock market is rich. Most stocks are selling at high multiples of their intrinsic value.
The intrinsic value can be measured by a company’s earnings per share, its sales per share, its book value (corporate net worth per share) or other measures.
By every measure I know, the market is expensive. The ratio of stock prices to earnings, for example, is 34 according to Barron’s Market Lab. That’s the highest I can remember, in the same neighborhood as at market tops in 1987 and 2000.
High valuations generally presage below-average returns over the coming five years. But they aren’t a great short-term signal. The market can stay expensive for quite a while, as it did for example in 1985-1987, until it crashed in October of 1987.
Short summary: All-time highs don’t worry me at all. High valuations keep me up at night.
Some Bargains
In an expensive market, some stocks still appear reasonably priced. Here are four that I like.
Progressive Corp. (PGR), a property-and-casualty insurance company, has been gaining market share from rivals, partly with a barrage of quirky, humorous TV ads. The stock sells for only 10 times earnings.
Over the past 10 years, Progressive has usually sold for about 14 times earnings. So, it’s at a discount to its own history, as well as to a richly valued market.
I think the stock deserves a better multiple. Over the past decade, it has grown its sales at a 12% annual clip, and earnings at about 18%. The latest results are even better.
D.R. Horton is the largest U.S. homebuilder, selling homes at almost all price points. New home purchases ran hot during the height of the pandemic, as people wanted uncrowded neighborhoods and space for a home office.
In the past four months or so, new home sales have cooled. Mostly likely, it’s because home prices have risen fast, pricing some buyers out of the market.
The way I see it, the rising home prices are a sign of strength, not weakness, for homebuilders. I like a bunch of them, but Horton is my favorite. It sells for nine times earnings.
Fox (FOXA) owns Fox News and Fox Sports, as well as 28 television stations. You may like the conservative Republic slant of Fox News, or you may hate it, but it has given Fox News a well-defined identity.
The stock sells for 11 times earnings because investors have concerns. For example, some people are terminating their cable service or cutting back on it, getting more of their news from the Internet. Also, TV networks are having to pay through the nose to get the rights to broadcast live sports.
Are these concerns legitimate? Yes, in my view. But that’s why the stock is relatively cheap, and at the present price (around $36 a share), I think it’s a good value.
Finally, I recommend Cooper Companies Inc. (COO), one of the largest U.S. manufacturers of contact lenses. It also makes obstetrical and gynecological products, including the Paragard IUD (intrauterine device for birth control).
Cooper acquired the Paragard from Teva Pharmaceuticals and both firms are involved in litigation from plaintiffs who allege that the product can fragment and lodge within the body when a doctor tries to remove it. I believe that’s why Cooper shares go for nine times earnings.
I claim no expertise on the litigation. But if it goes as these things usually do, it will eventually be settled for a substantial but not crippling sum.
Disclosure: I own D.R. Horton personally and for most of my clients. I own Progressive for some clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.
Netgear and Auto Nation Look Cheap Based on This Ratio
Posted: July 29, 2021
July 19, 2021 (Maple Hill Syndicate) – Suppose you had the opportunity to buy a big, lumbering company with huge sales but slender profits.
Would you do it?
You would if you thought you could turn the company around. Perhaps you could improve the product, raise prices, cut expenses or find other ways to improve those puny profits.
Investors who are looking for turnaround candidates often use the price-to-sales ratio. To compute it, divide a stock’s price by the company’s sales per share. For example, Coca-Cola Co. (KO) has 4.3 billion shares outstanding and has revenue of around $33 billion.
That works out to $7.33 a share in sales. The stock fetched $54.48 at this writing, so the price-to-sales ratio was 7.43.
That’s a high ratio, because Coca-Cola is a popular stock with high profit margins. Most stocks these days sell for between two and three times sales. Unpopular stocks with low profit margins sell for 1.0 times sales or less. I’m going to recommend some of those unpopular stocks today.
The Record
Beginning in 1998, I’ve written 18 columns about stocks with low price/sales ratios. (Today’s is the 19th.)The average one-year gain on my selections has been 33.7%, compared to 10.1% for the Standard & Poor’s 500 Index.
If you’re a knowledgeable investor, you are probably doubting my word right now. My performance is due in substantial part to returns of 177%, 99% and 69% from 2000 through mid-2003. Value investing was having a heyday then.
Of the 18 columns, 16 have been profitable and 11 have beaten the index.
Bear in mind that my column results are hypothetical: They don’t reflect actual trades, trading costs or taxes. These results shouldn’t be confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future results.
Last year’s column did not beat the index, which was up almost 41%. But it did notch a 32% gain, led by Raytheon Technologies Corp. (RTX), which returned 49%. The worst performer was Sprouts Farmers Market Inc. (SFM), up 9.2%.
Netgear
Now it’s time for some new picks among stocks selling for less than 1.0 times sales – often substantially less.
I’ll start with Netgear Inc. (NTGR). Based in San Jose, California, the company provides telephone and computer networking for homes and small or medium-sized businesses.
Netgear’s debt is low, only 5% of the company’s net worth. It has been profitable in 14 of the past 15 years, but profits are rarely outstanding. That’s why the price-to-sales ratio is only 0.88.
Because it’s a relatively small company, only three Wall Street analysts follow Netgear. Two call it a “buy,” one a “hold.” On the bullish side is Raymond James, a firm for whose research I have respect.
AutoNation
Investors know that car sales are cyclical. So perhaps it’s not surprising that AutoNation Inc. (AN), which runs 230 car dealerships, sells for only 0.43 times sales.
I think it deserves better. AutoNation has been profitable in 14 of the past 15 years. Return on invested capital exceeded 15% in the latest quarter, the best the company has done in a long time.
Meanwhile, the dealership chain has pared down to 65% of stockholders’ equity, the lowest it’s been since 2010.
MYR Group
Based in Rolling Meadows, Illinois, MYR Group Inc. (MYRG) provides electric construction services. It engineers wiring systems for municipal lighting systems, factories, and power grids.
Lewis Edward Myers, who worked as a salesman for Thomas Edison, founded a predecessor company, L.E. Myers Co. The company joined with Sturgeon Electric Co. and Harlan Electric Company to form MYR Group in the 1990s.
One thing I like about this company is its strong balance sheet, with debt only 11% of stockholders’ equity. The stock sells for 0.66 times sales, which is more expensive than its 10-year average, but still in bargain territory.
Tutor Perini Corp.
One of the cheapest stocks, judging by the price-to-sales ratio, is Tutor Perini Corp. (TPC), a small engineering and construction company. One of its specialties is building casinos. The stock goes for a mere 0.13 times sales.
With an infrastructure bill likely to pass Congress, I think engineering and construction companies are likely to do well in the next two to three years.
I owned this stock some years back, but not currently. Its returns on invested capital have been mediocre for the past decade. I think the company is in need of a turnaround, and perhaps new management. But then, spotting turnaround candidates is one of the things the price-to-sales ratio is good for.
Disclosure: Some of my clients own Raytheon Technologies. I don’t own it personally.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.
The Perfect 10 Portfolio Returned 69% Last Year
Posted: July 15, 2021
July 12, 2021 (Maple Hill Syndicate) – To call a beautiful woman a “Perfect 10” these days would be considered chauvinistic and outdated.
But my Perfect 10 Portfolio is still looking good.
This is a hypothetical portfolio of stocks, each of which sells for 10 times the company’s earnings per share. Historically, most stocks sell for about 15 times earnings, so a multiple of 10 is a bargain.
In today’s hot market it’s even more of a bargain, since the average stock now fetches about 33 times earnings.
Popular stocks have high price/earnings ratios, and unpopular stocks have low ones. I’ve always believed that unpopular stocks are the best road to stock-market gains, even though that belief has been severely tested in the past three years or so.
The Record
Beginning in 2000, I’ve compiled the Perfect 10 Portfolio 18 times (today’s is the 19th). The average one-year return has been 21.9%, which looks very good compared to the Standard & Poor’s 500 Index at 10.9%.
Last’s year’s Perfect 10 choices returned 69.3%, versus 38.8% for the index. Buckle Inc. (BKE) led the way with a 206% gain.
Raymond James Financial Inc. (RJF) contributed a 92% return, and Mohawk Industries Inc. (MHK) chipped in 88%. The worst performer was Farmers & Merchants Bancorp. (FMAO), up less than 8%.
My column results are hypothetical: They don’t reflect actual trades, trading costs or taxes. They shouldn’t be confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future results.
15 of the 18 Perfect 10 columns have been profitable, while 12 have beaten the index.
New Lineup
Here’s the new Perfect 10 Portfolio — ten stocks you can buy for about 10 times earnings each.
Amalgamated Financial Corp. (AMAL), is a small bank that concentrates on big markets – New York, Boston, San Francisco and Washington. It has greatly reduced its debt in the past three years, to the point that debt is now only 10% of stockholders’ equity.
America’s Car-Mart Inc. (CRMT) sells used cars to people with shaky credit, mainly in the South. It knows how to price car loans to take into account the risk of non-payment. The used-car market happens to be hot right now, but I like this company long-term; it even made money in the 2008 recession.
Cigna Corp., the big health insurer, seems like a solid bet to me. Radical overhaul of the nation’s health-care and insurance systems, an issue in the last Presidential election, has receded to the periphery. The company has shown a profit 29 years out the past 30.
D.R. Horton Inc. (DHI) is the nation’s largest homebuilder. I like the whole industry, but I consider Horton financially stronger than most of its competitors, with debt only 35% of stockholders’ equity. I also like it that Horton serves several different price points.
Federated Hermes Inc. (FHI) is one of the largest providers of money-market funds, and a major seller of stock and bond funds. You’ll find its offerings in many corporate pension and profit-sharing plans. It has consistently shown above-average profitability.
Hologic Inc. (HOLX) makes products for women’s health (especially breast cancer screening) and also engages in medical testing, including for Covid-19. With the pandemic waning, shares are down about 5% this year. Over the past ten years, the stock commanded a price/earnings ratio averaging 33, so the present multiple of 10 seems to me a bargain.
Laboratory Corp. of America Holdings (LH) seems timely to me. The Covid-19 epidemic is moving from a crisis to a problem, at least in this country. But I believe the future will involve more frequent medical tests for a variety of medical conditions.
Lumber Liquidators Holdings Inc. (LL) sells flooring, especially hardwood flooring. This is a turnaround story. The company had four money-losing years, and was fined $33 million for misleading investors about Chinese flooring that contained formaldehyde. There are flaws, but I think the stock is cheap.
Turtle Beach Corp. (HEAR) sells headphones and headsets for gamers, including virtual-reality sets. The company’s products really took off during the pandemic, which is now waning. But I think it can hold onto much of the business it gained, and perhaps more.
Zumiez Inc. (ZUMZ) is a clothing company for young people who skate or skateboard, or want to look like they do. It sells its clothing both in stores and online. Sales have grown at a 10%-a-year clip for the past ten years, and faster lately.
Disclosure: I own America’s Car-Mart and D.R. Horton personally and for most of my clients. I own Turtle Beach personally and in a hedge fund I manage.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.
Thor and KB Home are on the Casualty List
Posted: July 06, 2021
July 5, 2021 — (Maple Hill Syndicate) – You might think that only a bumbling company could see its stock decline in the second quarter. After all, the Standard & Poor’s 500 Index returned 8.55% for the three months through June.
But it isn’t so.
About a third of all stocks were down in the quarter. Some are good companies in my opinion, banged up by temporary bad news.
So, here is my latest Casualty List, devoted to stocks that have been wounded in the latest quarter and that I think can recover and thrive.
Thor
Thor Industries Inc. (THO), based in Elkhart, Indiana, makes recreational vehicles under the trade names Airstream, Jayco, Thor and others. A strengthening economy is its friend. Rising gasoline prices are its enemy.
The enemy had the upper hand in the second quarter, as Thor shares fell 16%. But step back a moment from the fuel price problem. Thor has increased its revenue by more than 16% a year in the past ten years, and increased its profits by more than 10% a year.
During that decade, fuel prices waxed and waned – and they will continue to do so. Surveys (admittedly by the industry) show a growing number of younger people want to own an RV.
From 2014 through 2018, Thor earned better than 20% on invested capital each year. It had weaker, but still profitable, years in 2019-2020. Lately, profitability is on the increase again.
KB Home
After roaring during the pandemic, new home sales have declined in three of the four months through May. That took the wind out of the sails for most homebuilding stocks. KB Home (KBH), for example, was down 12%.
Meanwhile, the average price of a home has soared. The median home sale in May was for $374,400, a record and well above the 2019 average of $321,500.
To me, the picture painted by these numbers is that there is a shortage of homes. Until their recent swoon, homebuilding stocks had been rising smartly. KB Home, despite its second-quarter decline, is up 39% for the 12 months through July 1. I think demand is strong and the group will resume its advance.
Schneider
Schneider National Inc. (SNDR), with headquarters in Green Bay, Wisconsin, is the eighth largest trucking company in the U.S. by revenue. Its stock fell 19% in the third quarter.
Schneider stock sells for close to 18 times recent earnings, but only 13 times the earnings analysts expect in the next four quarters.
Debt is only 15% of the company’s net worth, which I consider a strong ratio.
The company made a wrenching decision in 2019 to shut down its “last mile” service, which used to deliver appliances and other goods to people’s homes. It is concentrating instead on full-truckload industrial and commercial shipments.
I think that was the right decision.
Worthington
My final recommendation today is Worthington Industries Inc. (WOR), a Columbus, Ohio, company that makes steel products such as gas cylinders and oil storage tanks.
Worthington shares were nicked for an 8% loss in the second quarter. Like the other stocks I’m recommending today, it’s a cyclical stock that rises and falls with the tides of the economy. Investors loved cyclicals in the first quarter, but in the second quarter they favored momentum and growth stocks.
I view cyclical stocks favorably. I think the U.S. is in for a boom the likes of which we haven’t seen for more than a decade.
Worthington’s return on invested capital had been mostly mediocre for the past decade, but it improved in fiscal 2021 and has been very good the past two quarters.
The Record
Today’s is the 73rd Casualty List I’ve compiled over a period of two decades. I can calculate 12-month returns for the first 69 lists.
The average 12-month return has been 17.6%, far outdistancing the S&P 500 Index, which averaged 11.0%.
Forty-five of the 69 columns have been profitable, and 36 have beaten the index.
Bear in mind that my column results are hypothetical: They don’t reflect actual trades, trading costs or taxes. These results shouldn’t be confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future results.
My list from a year ago returned 43.4%, edging out the S&P at 42.8%. The returns are high, reflecting the nation’s recovery from the Covid-19 pandemic.
My best performer from a year ago was Moog Inc. (MOG.A), which returned 59%. The worst was Barnes Group (B), up 31%.
Disclosure: I don’t personally own the stocks discussed today. I own Worthington Industries for one client.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.