Month: January 2025
Six Cheap Stocks with Great Five-Year Returns
Posted: January 28, 2025
January 29, 2024 (Maple Hill Syndicate) – For years, my mentor, David Dreman, invested in Westinghouse Electric Co.
The stock was cheap, often selling for about nine times the company’s per-share earnings. The stock price marched up nicely, yet the stock stayed cheap, because earnings were rising as fast as the stock price. That’s a value investor’s dream.
Today, Westinghouse is in the dust bin of history, and Dreman is mostly retired. But I long to find today’s version of what I call the Westinghouse Effect.
Here are a few possible candidates. These six stocks are relatively cheap, and have achieved total returns of more than 500% over the five years through January 23.
Core Natural
Core Natural Resources Inc. (CNR), a coal company of all things, has returned 951% over the past five years.
Core was formed January 15 of this year by the merger of Consol Energy Inc. and Arch Resources Inc. The 951% figure cited above is for shareholders who originally held Consol. Arch shareholders didn’t do badly either: They got between a double and a triple.
The great investor Charlie Munger once said that value investors run the risk of holding “a melting ice cube.” You can make an argument that coal companies are just that.
My view is different. Although coal is a highly polluting fuel, it is an important one, and probably for the next decade a necessary one.
I like Core’s balance sheet. It has more than two dollars in cash for every dollar of debt. Debt is only 13% of the company’s net worth. The stock sells for seven times earnings.
Build-a-Bear
Maybe your young kids had a birthday party sometimes at Build-a-Bear, a store where they can choose a stuffed animal, fill it at a stuffing machine, and buy clothes for it too.
Five years ago, Build-a-Bear was in tough shape, and bankruptcy rumors flew. The pandemic had hit the company hard. People stopped going to malls, and all 400 of its stores were closed for a while.
Yet, Build-a-Bear Workshop Inc. (BBW) has achieved a five-year return of 817%. It’s an example of the wisdom in mutual-fund legend John Templeton’s admonition to buy at “the point of maximum pain.”
Dillard’s
Who says department stores are dinosaurs? You can’t prove it by Dillard’s Inc. (DDS). Its shares have provided a 752% return in the past five years, when most department-store stocks have been flat to down.
About a month ago, Fortune magazine ran a feature on the company by Phil Wahba, which pointed out that Dillard’s stock “has beaten Tesla, Apple and Microsoft over the past four years.” He called the chain “old fashioned,” but noted that service is good and the stores intelligently located.
The company’s service territory is the South and Southwest, the faster-growing part of the U.S. I’ve recommended the stock several times in this column over the years.
Cooper Group
Mr. Cooper Group Inc. (COOP) is a mortgage lender and mortgage servicer based in Coppell, Texas. Its five year return: 684%. It’s the largest mortgage servicer in the U.S., and that’s significant because income from servicing is steadier than that from mortgage origination.
The company had a major breach in 2023. Hackers stole personal information on some 15 million customers, including Social Security numbers and bank account numbers. Litigation stemming from the breach is still in progress. Nonetheless, six of the eight analysts who follow the stock recommend it.
Abercrombie & Fitch
Up 632% in the past five years is Abercrombie & Fitch Co. (ANF), which sells clothing to teens and young adults. It’s shown a profit in 14 of the past 15 years (the exception being pandemic-scarred fiscal 2021). Revenue and earnings growth has accelerated lately.
Profit margins have usually been slender (as is typical of clothing retailers) but have improved lately. I like the stock, and have recommended it in this column several times.
Riley Exploration
The smallest stock I’ll discuss today is Riley Exploration Permian Inc. (REPX). As its name suggests, it produces oil and gas in west Texas and eastern New Mexico, home of the Permian Basin. It had very little revenue until 2021, but now is up to $407 million revenue in the past four quarters.
The stock chart shows a jagged pattern, with a five-year return of 512%. I’d consider the stock speculative. But I like the valuation, which is six times recent earnings and less than five times estimated earnings for 2025.
Disclosure: I currently have no positions in the stocks discussed today, personally or for clients.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.
D.R. Horton and Nucor Are on the Casualty List
Posted: January 22, 2025
January 20, 2025 (Maple Hill Syndicate) –- A stock can be down but not cheap, or cheap but not down.
The stocks on my Casualty List are both. They are stocks that have been pummeled in the latest quarter, and that I think have strong rebound potential.
I’ll lead off my latest Casualty List with D.R. Horton Inc. (DHI), the largest U.S. homebuilder. Seven-percent mortgages have been poisonous to homebuilders, and Horton was down 26% in the fourth quarter – in a rising market, at that.
If you had held Horton for the past ten years, you would have made 543% on your investment (as of January 17). When people got excited about the Federal Reserve easing interest rates, the stock climbed within a few pennies of $200. But now it has fallen to about $148.
Home prices are too expensive for builders’ own good. The supply of homes is pinched because people don’t want to move and get an expensive mortgage to replace their cheap one.
Horton shares languish at about 10 times the company’s per-share earnings. I consider it – and many other homebuilders – to be a bargain at current quotes. There’s a lot of pent-up demand for single-family homes.
Nucor
Next up in the hospital ward is Nucor Corp. (NUE), the nation’s largest steel manufacturer, down 22% in the fourth quarter. Steel companies already enjoy some tariff protection from imports, and if President Trump has his way on tariffs, they will soon have more.
Nucor’s sales and profits both fell sharply in 2024, as demand was weak in the automotive, housing and office-building markets. But normally, the company has done well. In the past ten years, it has averaged better than 10% sales growth per year, and earnings have outpaced sales.
Of the 14 analysts who follow Nucor, eight call it a “buy”, five a “hold” and one a “sell.” I find this encouraging, not because buy ratings predominate, but because opinions are split. I prefer an uncertain outlook because it means the stock has a better chance of surpassing expectations.
Huntington Ingalls
Smacked for a 28% loss in the fourth quarter, Huntington Ingalls Industries Inc. (HII) is the largest builder of ships for the U.S. Navy, and has close to a duopoly in that business with General Dynamics Corp. (GD).
In announcing disappointing earnings for the third quarter, Chris Kastner, the chief executive, noted that the contracts for “nearly all of the ships currently under construction were negotiated prior to Covid.” Since then, he said, “we have seen a significant loss of shipbuilding experience in our yards.”
In less than a year, the stock has fallen from $299 to about $203. I think that’s overkill. The company has earned a return on equity of 20% or better (excellent, by my lights) in nine of the past 13 years.
Congress may well increase spending on naval warships. According to the Center for Strategic and International Studies, China now has 234 warships, surpassing the U.S. total of 219.
Peabody Energy
Many people thought the coal industry was dead meat, but it’s revived with increasing demand for electricity and support from Donald Trump. Peabody Energy Corp. (BTU) has a pretty good balance sheet, with debt only 12 percent of the company’s net worth.
Peabody shares fell 21% in the fourth quarter, as investors disliked its acquisition of the metallurgical coal business of Anglo American. Perhaps coal is a buggy-whip industry, but with Peabody stock at five times earnings, I think it’s a good speculation.
Past Record
The Casualty List you’re reading is the 87th one I’ve compiled. One-year returns can be calculated for 83 lists, and the average one-year return has been 14.8. That beats the 11.5% average for the S&P 500 Total Return Index over the same intervals.
Fifty-three of my Casualty Lists have been profitable and 39 have beaten the index.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
Results of my picks a year ago were disappointing. Target Hospitality Corp. (TH) and Ovintiv Inc. (OVV) were up 15.9% and 13.1% respectively, but fell short of a surging S&P 500 at 26.1%. My other two picks lost ground. BorgWarner Inc. (BWA) slipped 0.2% and Patterson-UTI Energy Inc. (PTEN) fell 6.2%.
Averaging those four stocks together gave an anemic 5.7% return. Let’s hope that today’s crop does better.
Disclosure: I own D.R. Horton for one or more clients. I own General Dynamics personally and for most of my clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts. He or his clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.
Can Analysts Pick Stocks? I Doubt It
Posted: January 15, 2025
January 13, 2025 (Maple Hill Syndicate) – Can professional analysts pick stocks?
Don’t laugh. Analysts perform many valuable functions. They ask probing questions to management, estimate earnings, and provide a wealth of information on companies and industries.
However, a study I’ve been conducting for a quarter of a century suggests they are no better at picking stocks than your Aunt Louise.
Each January, I make note of the four stocks analysts most adore, and the four they most despise. When the year is over, I compare how those two groups of stocks have done.
The results are not favorable to Wall Street. On average, over 26 years, the analysts’ darlings have returned 7.25%. The stocks they hate have averaged 6.89%. Neither group beats the Standard & Poor’s 500 Total Return Index, which rolled in at 12.57% per year.
My study covers every year from 1998 through 2024, except for 2008 when I was temporarily retired as a columnist. Figures are total returns, including dividends and capital gains or losses.
Latest Scores
A year ago, the most popular stock among analysts was Schlumberger Ltd. (SLB), which garnered 20 “buy” ratings with nary a “hold” or “sell” in sight. What did Schlumberger do for the year? It fell 24.4%.
Privia Health Group Inc. (PRVA), which was fourth on analysts’ most-loved list, also fell. It lost 15.1% of its value.
Better was S&P Global Inc. (SPGI), which returned 13.9%. And the analysts had one big winner: Targa Resources Corp. (TRGP) more than doubled, returning 110.1%. That pulled the analysts’ average up to 21.1% for 2024.
What about the stocks that analysts despised? They all had modest gains. Avista Corp. (AVA) was up 7.8%, Southern Copper Corp. (SCCO) up 8.3%, and Chenierre Energy Partners (CQP) up 14.3%. The best performer for the hated brigade was Moelis & Co. (MC), which returned 37.3%.
Collectively, the stocks that Wall Street wouldn’t touch achieved a 16.9% return, a little more than four percentage points below the analysts’ favorites.
Running Tally
In 26 outings, the analysts’ most-adored stocks have beaten their most-despised names 14 times. The despised brigade have won 11 times, and there was one tie.
Against the S&P 500, neither group distinguished itself. The analysts’ favorite have beaten the index only seven times out of 26, while the despised issues have beaten it 10 times.
Data for the study come from Zacks Investment Research, Bloomberg and Ned Davis Research.
Most Adored
The two stocks analysts most favor as 2025 begins are both airline stocks. United Airlines Holdings Inc. (UAL) get 22 buy ratings, with no sells or holds. The analytical corps is almost equally bullish on Delta Air Lines Inc. (DAL) with 21 unanimous recommendations.
It’s easy to see why the analysts have warmed up to airlines. Traffic has picked up for both business and leisure travel, and jet fuel is not too expensive these days. But let’s remember that Warren Buffett once said it would have been good for investors if someone had shot Orville and Wilbur Wright.
Third on the adored list is Arcelix Inc. (ACLX) with 19 recommendations and no dissents. Arcelix, based in Redwood, California, is a biotech company that says it is “reimagining cell therapy through the development of immunotherapies for patients with cancer and other incurable diseases.”
A worthy goal, to be sure. But Arcelix had revenue of just under $156 million in the past four quarters, while the market values the stock at $3.47 billion. Several company insiders have sold some of their stock in the past few months.
Rounding out the adored group is Axsome Therapeutics (AXSM) unanimously endorsed by 18 analysts. The company, based in New York City, is developing therapies for diseases of the central nervous system.
Most Hated
On the list of stocks that analysts can’t stand, ZIM Integrated Shipping Services Ltd. (ZIM) ranks first, with five out of seven analysts suggesting that people dump the stock. The stock sells for about $19, down from about $77 four years ago. ZIM has lost money in six of the past ten years.
Ginko Bioworks Holdings Inc. (DNA), a Boston-based bioengineering company, is ranked “sell” by four of the six analysts who cover it. Losses are narrowing, but analysts don’t expect a profit before 2027.
CNX Resources Corp. (CNX) gets eight sell ratings from the 13 analysts who follow it. Based in Canonsburg, Pennsylvania, it produces and transports natural gas in the Appalachian Basin.
Finally, AMC Networks Inc. (AMCX) is considered a “sell” by three of the five analysts who venture an opinion.
I have a hunch the analysts darlings can beat their pariahs in 2025. But it’s hard to be sure. And that is precisely the point.
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 Robot Portfolio Gained 22% in 2024
Posted: January 07, 2025
January 6, 2025 – (Maple Hill Syndicate) – The Robot Portfolio returned more than 22% last year but was edged out by the surging Standard & Poor’s 500.
Each year, the Robot – a naïve stock-picking paradigm, generates a theoretical portfolio of ten very unpopular stocks. The idea is that stocks advance by exceeding expectations, and low expectations are easier to exceed.
Over the past 26 years, this hypothetical portfolio has returned 1,710%, compared to 673% for the Standard & Poor’s 500 Index.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
How It Works
I designed the selection criteria, but a computer programs picks the stocks that compose the Robot Portfolio. Some of them I wouldn’t touch with a ten-foot pole; others I like. They are the ten stocks selling for the lowest multiple of the company’s earnings, with three provisos:
- The company must show a profit for the past four quarters.
- The market value of the stock must be at least $500 million.
- The company’s debt must be less than its equity (net worth).
11.8% Per Year
In 26 years, the Robot has beaten the S&P only 13 times. But when it does well, it tends to do very well. In four years, the Robot’s return has exceeded 50%. In six years, it has been between 25% and 50%.
The paradigm has also generated some big losses, most notably a 60.8% loss in the recession-scarred year of 2008. The S&P 500 Total Return Index declined 37% that year.
The compound average return for the Robot has been 11.8% per year, compared to 8.2%% for the S&P 500.
Last year, the Robot returned 22.7% but couldn’t beat the S&P 500’s total return, which was 25.0%. The portfolio’s best performer was CNX Resources Corp., a natural gas producer, up 83%. The worst was PBF Energy Inc. (PBF), a refiner, which fell almost 40%.
New Slate
As we enter 2025, there’s an entirely new slate of Robot stocks. They are listed with the cheapest (lowest price/earnings ratios) first.
Site Centers Corp. (SITC), sells for 1.1 times the past four quarters’ earnings. Future earnings for this shopping-center real estate investment trust may be less because it has spun off some of its properties.
Selling for 2.2 times earnings is Vital Energy (VTLE), an oil-and-gas company from Tulsa, Oklahoma. Revenue and earnings have fallen in the past year, and the company has posted four losses in the past ten years.
Weighing in at 2.8 times earnings is Agios Pharmaceuticals Inc. (AGIO), which seeks to find treatments for cancer and rare diseases. The company has lost money most years, and the stock has fallen 71% over the past decade. Still, most analysts like its prospects.
Shenandoah Telecommunications Co. (SHEN) sells for 3.2 times earnings. It’s a broadband provider based in Edinburg, Virginia, that also leases out cell tower space. The stock is down 50% in the past three years as earnings have collapsed.
Crude Carrier
International Seaways Inc. (INSW) sells for 3.4 times earnings. With a fleet of 83 vessels, primarily carrying crude oil, it has earned handsome profits the past three years. But it lost money in seven of the previous eight years.
Ball Corp. (BALL), at 4.1 times earnings, is the world’s largest maker of aluminum cans. It has grown its earnings at a 6% annual clip for the past ten years, and is consistently profitable (no loss years since 2001).
FMC Corp. (FMC) makes herbicides, fungicides and insecticides. One of its major markets is Brazil, which has been suffering from drought, reducing demand for FMC’s products. The stock now fetches 4.2 times earnings.
Based in Stamford, Connecticut, Dorian LPG Ltd. (LPG) carries liquefied petroleum gas (a mixture of propane and butane) on 22 ships. The stock is at about $25 and most analysts think it could hit $41 in a year. The P/E ratio is 4.2.
One publicly traded limited partnership makes the roster: Steel Partners Holdings LP (SPLP). Based in New York, it’s a small conglomerate, with interests in industrial products, defense, energy, banking, and youth sports. The P/E ratio is 4.4.
Rounding out the Robot Portfolio is Northern Oil & Gas Inc., with a P/E of 4.6. It explores for and drills for oil and gas in Montana, New Mexico, North Dakota, Ohio, Pennsylvania and Texas. It’s turned a profit in five of the past ten years.
Does this seem like a rag-tag collection of stocks to you? That is exactly what it is, but such ragamuffins have often done well in the past.
Disclosure: I own none of the stocks discussed today, personally or for 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.