A Thanksgiving GARP Feast for Investors
Posted: November 27, 2020
November 23, 2020 (Maple Hill Syndicate) – Most of the stocks I own for clients are value stocks, selling for 15 times the company’s earnings or less.
However, there is room in my heart – and in my portfolio – for a few GARP stocks. GARP stands for growth at a reasonable price. It’s the middle ground between value investing (bargain hunting) and growth investing (seeking companies whose earnings are growing rapidly).
Once a year at Thanksgiving time – which after all is time to loosen one’s belt – I devote this column to a few GARP picks that I think are worthy of consideration. These stocks sell for 15 to 20 times per-share earnings, a little more than I’d normally pay, but not exorbitant.
We live in a world where semiconductors have more and more uses: computers, smart phones, cars, dishwashers, ovens, home security systems, and many more. That bodes well for Applied Materials Inc. (AMAT), one of the largest suppliers of equipment to semiconductor companies.
At about $77 a share, Applied Materials sells for 19.6 times earnings, which is at the top of my GARP range. But look at its growth. Earnings have grown at a 26% pace the past five years, and 37% in the past four quarters.
The company is spending well over $2 billion a year on research and development, or about 13% of revenue. That should help keep it on top of the field.
The Timken Co. (TKR) has amazed me for years. Its main product, ball bearings, couldn’t be more prosaic. But Timken has advantages over its competitors in quality control and economies of scale. It has shown a profit in 14 of the past 15 years, and high profits lately.
Timken produced more than 15 million ball bearings for Jeeps used in World War II (thanks, Wikipedia). More recently, its parts have found a place in the Mars Rover and offshore wind turbines. Industrial machinery and cars are key markets, but its customer base is remarkably diversified.
Ciena Corp. (CIEN), based in Hanover, Maryland, makes optical telecommunications network equipment. AT&T, Century Link and Verizon all buy its equipment.
Ciena’s stock was above $60 as recently as August. It has dropped to around $42. CEO Gary Smith warned in September that he sees a “broad based” slowdown in orders over the next few quarters.
Despite his pessimistic forecast, Smith said that Ciena has been gaining market share from competitors.
Health Care Services
Hospitals and nursing homes need laundry, housekeeping and food service. That’s what Health Care Services Group (HCSG) provides. The Bensalem, Pennsylvania, company first hit $1 billion in sales in 2012, and cracked the $2 billion barrier in 2018. Lately, it’s running at a pace of about $1.8 billion.
In a presentation to investors, Health Care Services says it will benefit from “the greying of America.” I think that’s basically true, although there are many cross-currents.
The company’s earnings history is spotty, but there are two strong points. The dividend yield is 3.6%. And the company carries debt of less than 3% of stockholders’ equity.
Home builders originally relied entirely on wood, then found that plywood is cheaper and better in some applications. Louisiana-Pacific Corp. (LPX) invented oriented strand board, an alternative to plywood, and specializes in producing it. It contains wood chips arranged (oriented) to increase strength.
As you might expect, Louisiana Pacific tends to rise and fall with the homebuilding industry. That’s fine with me, as I’m optimistic about the home builders.
It’s fair to admit that the company’s earnings are erratic. But lately they are strong: Its third-quarter profit of $1.57 a share beats most of its full-year results.
I started my Thanksgiving GARP tradition in 1998, and have continued it every year since, except for three years. In 19 tries, my GARP picks have beaten the Standard & Poor’s Index 11 times, and been profitable 12 times.
The average 12-month return on my GARP recommendations has been 11.0%, versus 9.2% for the S&P 500.
Bear in mind that my column recommendations 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 picks were unsuccessful, losing 2.5% while the S&P 500 rose 15.6%. Herman Miller Inc., Skechers Inc. (SKX) and Texas Pacific Land Trust (TPL) declined. Kadant Inc. (KAI) and CBRE Group Inc. (CBRE) gained, but it wasn’t enough.
Disclosure: I own call options on Applied Materials in a private partnership that I manage.
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 firstname.lastname@example.org.