A Billion-Dollar Market Value is a Sweet Spot for Stocks
Posted: October 22, 2024
October 21, 2023 (Maple Hill Syndicate) – I like companies with a market value around $1 billion. I think it’s a sweet spot – big enough to be “discovered” by institutional investors, yet still small enough to show dramatic growth.
Each year around this time, I’ve written about a few companies in that size range, on the border between small and medium-sized. I call it the Billion Dollar Portfolio. The results have been good, with an average 12-month return of 13.7%.
Here are five stocks for the coming year’s Billion Dollar Portfolio.
Beazer Homes
The big plus for homebuilders such as Beazer Homes USA Inc. (BZH) is that there’s pent-up demand for houses. Unfortunately, mortgage rates have been a pain in the neck. Lately, mortgage rates have come down a peg, making it a bit easier for people to buy houses.
I fondly remember 2005, when more than 1.3 million new homes were sold in the U.S. Lately, new-home sales are running at a pace of roughly 700,000. I hope that rates will decline further in 2025, which could boost the figure back near the one-million mark.
Beazer’s average selling price is around $520,000, which is about $100,000 more than the median new-home price. Its headquarters is in Atlanta, and its service territory includes a lot of Southern states, where population is growing fast.
John B Sanfilippo
Nuts, anyone? John B.Sanfilippo & Son Inc. packages and sells almonds, cashews, peanuts, pecans and walnuts. It does a lot of store brands, and also has three brands of its own: Fisher, Orchard Valley Harvest, and Sunshine country.
On measures of financial strength, the company, which is based in Elgin, Illinois, scores very high. For example, its debt is only 1% of the company’s net worth.
On growth, it doesn’t score as highly. Revenue has grown only 1.5% per year in the past decade. Yet, the company has managed to improve its profits by more than 9% per year.
Bel Fuse
I’ve mentioned Bel Fuse Inc. (BELFA) a couple of times in this column as a stock company that combines value with growth. Originally, it made fuses for cars. Today (after more than a dozen acquisitions) it has a broad product line of electronic components.
Over the past 10 years, Bel Fuse stock has more than quadrupled. And it’s jumped 65% so far this year. For that reason, I no longer love it, but I still like it. Excluding nonrecurring items, the stock sells for about 10 times earnings.
Shoe Carnival
From Evansville, Indiana, comes Shoe Carnival Inc. (SCVL), which sells shoes to men, women and children from more than 400 stores in some 36 states.
Like many small stocks, it’s followed by very few analysts – in this case, three. Their average prediction is that the stock, currently just below $40, will hit $50 in a year.
Sales and earnings have slowed down, which is why the stock is selling for 14 times earnings in a market where the median earnings multiple is about 24. Over the past decade, however, Shoe Carnival has increased sales 7.8% a year, and profits faster.
Hyster-Yale
Based in Cleveland, Ohio, Hyster-Yale Inc. (HY) makes lift trucks and related parts. The company posted losses in 2021 and 2022, but came back strong last year and this year.
Hyster-Yale is one of the ten largest makers of lift trucks worldwide. Yet it is followed by even fewer analysts than Shoe Carnival – only two. They both rate it “outperform.”
Hyster Yale sells for an unusually low valuation, only seven times earnings and 0.28 times revenue. At these cheap ratios, I think it qualifies as a bargain.
The Record
This is the 20th column I’ve written about stocks in the $1 billion market-value area, starting in 2001.
The average 12-month return on my recommendations has been 13.75%, edging out the Standard & Poor’s 500 Total Return Index at 13.35%.
Fourteen of the 20 columns have shown a profit, and 11 of them 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.
My picks from a year ago rose 22.26%. Normally that would be great, but the market was surging and the S&P 500 (with dividends reinvested) returned 41.09%. My best pick was Apogee Enterprises Inc., up 90%. My worst was Sturm Ruger & Co., down 19%.
Disclosure: I own John B. Sanfilippo shares personally and for most of my clients.
John Dorfman is chairman of Dorfman Value Investments in Boston. His firm of clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.