Author: dorfman_wp_admin
My Five “GARP” Stock Picks for the Coming Year
Posted: November 22, 2016
“I am not a philanderer,” a colleague of mine once said, “But if I were….” He then proceeded to say which of our co-workers he found most attractive.
In the same vein, I am not a GARP investor. GARP stands for “growth at a reasonable price.” It is the middle ground between the value school of investing (bargain hunting) and the growth school (finding the next Google). I’m a dyed-in-the-wool value guy.
Once a year, around Thanksgiving time, I loosen my belt and select a few stocks I think are attractive from a GARP perspective. The stocks I will recommend today sell for 16 to 20 times the companies’ per-share earnings. Normally, I won’t pay more than 15 times earnings.
I have a couple of colleagues who are closer to the GARP school than I am. Therefore, there are a few GARP stocks in my firm’s client portfolios.
Here are five GARP stocks I would buy “if I were” a GARP investor.
Applied Materials
Applied Materials Inc. (AMAT), based in Santa Clara, California, is one of the largest semiconductor equipment manufacturing companies. It also makes solar-energy equipment and factory-automation software.
In its latest fiscal year, which ended in October, it appears the company just missed breaking its profit record, set in 2007. The stock sells for just under 20 times recent earnings, but only about 13 times the earnings analysts expect for fiscal 2017.
Electronic Arts
A video game company, Electronic Arts Inc. (EA) has shown outstanding profitability in the past two fiscal years and so far this year. Return on stockholders’ equity has been north of 30%, which is outstanding.
If you (or your children) have played The Sims, Need for Speed, or Battlefield, you have been using Electronic Arts products.
My clients own Electronic Arts shares, even though it sells for 20 times earnings, which is rich for my blood. My colleague Katharine Davidge chose it for my firm’s Model Portfolio, the basis for many client holdings.
FactSet Research
The two selections mentioned so far are large-company stocks. A mid-sized GARP pick I like is FactSet Research Systems Inc. (FDS), which is one of the best-known stock-market database companies. I’ve used its products off and on for a couple of decades.
FactSet made a profit in each of the past 15 years – yes, even in recession-ripped 2008. According to Guru Focus, its ten-year revenue growth rate is about 12%, its five-year rate is close to the same mark, and the latest year saw 14% revenue growth. The stock fetches 20 times earnings.
My colleague Tom Macpherson owns FactSet in a couple of accounts he personally manages.
Leggett & Platt
From Carthage, Missouri comes Leggett & Platt Inc. (LEG). It makes a variety of industrial products, from mattress coils to lumbar supports for car seats, from steel rod to frames for reclining chairs.
Sounds prosaic, but this metal bender has posted a profit in 14 of the past 15 years, and profitability hit a high in the past four quarters, with a sterling return on equity of 35%.
Given those achievements, a price/earnings multiple of 18 seems reasonable.
Ruth’s Hospitality
I’ll close with Ruth’s Hospitality Group Inc. (RUTH), which owns three chains of steak restaurants and two chains of fish places. The best-known subsidiary is Ruth’s Chris Steak House.
After a disastrous 2008, Ruth’s Hospitality has bounced back with six profits in the past seven years. Results for the latest 12 months are the best since 2006 – a return on stockholders’ equity of about 34%.
Plus, I really like their steak.
The stock trades at 18 times recent earnings.
Track Record
This is the 16th column I’ve written recommending stocks from a GARP approach. The recommendations from the previous ones have achieved a 12-month return of 11.57% on average. The comparable figure for the Standard & Poor’s 500 Index is 7.96%.
Ten of the 15 columns have been profitable, and ten (but not the same ten) have beaten the S&P 500.
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.
My recommendations from a year ago returned 3.09% versus 6.75% for the index. Lanstar System Inc. (LSTR) and General Dynamics Corp. (GD) did well, but Jones Lang LaSalle Inc. (JLL) dropped sharply.
Disclosure: Most of my clients own shares in Electronic Arts and General Dynamics, and so do some of my family members. A couple of my firm’s accounts own FactSet.
Nvidia and Newmont Mining Among Top Market Performers
Posted: November 01, 2016
Nvidia Corp. is the best-performing stock among the 500 stocks in the Standard & Poor’s 500 Index this year. In the 43 weeks through Friday, this up-and-coming technology firm has risen 114 percent.
Not far behind, at 97 percent, is Newmont Mining Corp., the largest U.S. gold miner. Then comes a pair of natural-gas distributors, Oneok Inc. at 95 percent and Spectra Energy Corp. at 76 percent.
Rounding out the top five, Freeport-McMoRan Inc., a copper miner, is up 61 percent.
Leaders like this are interesting, both in themselves and for what they tell us about investors’ appetites at a given time. Let’s have a look at these five stocks that are currently topping the charts.
Nvidia
I have never owned Nvidia (NVDA) shares, but my wife, Katharine Davidge, who is an analyst and portfolio manager at my firm, does. So far, she hasn’t teased me about her success with the stock. At least not too much.
Based in Santa Clara, Calif., in the heart of Silicon Valley, Nvidia makes specialized processing chips used in gaming, in smartphones and in cars. It also provides platforms for gaming, computerized design and other purposes.
Now that Nvidia has more than doubled in less than a year, Katharine faces a difficult decision. Should she take profits?
Since the stock now fetches 46 times recent earnings, eight times book value (corporate net worth per share) and almost seven times revenue, I think it would be wise. But then, I’m such a cheapskate that I wouldn’t have bought the shares in the first place.
Newmont Mining
Gold stocks tend to do well when inflation is high and rising and when there is international turmoil. Currently, inflation is low in the U.S., Japan and Europe, but I think it will rise in the next 18 months.
As for international tension, we are likely to have quite a bit, as the new U.S. president (be it Clinton or Trump) is tested by Russia, China, terrorists or adversaries in the Middle East.
Therefore, I wouldn’t be surprised to see Newmont Mining (NEM) tack on some additional gains in the next 12 months.
Oneok
Oneok Inc. (OKE), based in Tulsa, Okla., operates natural-gas pipelines, and does natural-gas gathering and processing. Its big percentage gain so far this year reflects the natural-gas industry’s recovery from terrible times last year.
I expect continued improvement for the industry but I wouldn’t buy Oneok shares. The company’s debt is higher than I like, and several of its stock valuation ratios are already up there — 26 times next year’s expected earnings, for example.
Spectra
It’s a similar story with Spectra Energy Corp. (SE), out of Houston, Texas. Its business lines are mostly the same as Oneok’s, and the reasons for the stock’s strength are similar. It sells for 31 times next year’s estimated earnings. If I owned either stock, I’d take some profits.
Freeport-McMoRan
I have owned Freeport-McMoRan (FCX) shares two or three times in my career, and my timing has already been bad. Known primarily for mining copper (67 percent of 2015 revenue), Freeport-McMoRan also produces oil and gas (11 percent), gold (10 percent), molybdenum (5 percent) and other materials (7 percent).
Copper’s price tends to swing strongly with the tides of the worldwide economy. Because economies have been slow in Europe and Japan, slowing in China and growing but not exactly robust in the United States, copper has been in the doldrums and so has Freeport-McMoRan.
The stock, which was above $50 in parts of 2007, 2008, 2010 and 2011, is now below $11. Even though it has gained 61 percent from its 10-year low at the start of this year, I think there is room for further gains. I like it for investors with a time horizon of more than one year.
Past results
I wrote columns similar to this one in 2012, 2014 and 2015. Five stocks were reviewed in each, for a total of 15 stocks. I said to avoid 13 of them, was neutral on one, and recommended one — Southwest Airlines Co. in October 2014.
Southwest (LUV) obligingly rose 28 percent. But to my chagrin, the 13 stocks I said to avoid rose by the same percentage. Meanwhile, the S&P 500 Index averaged 12 percent for the same three periods. Figures are 12-month total returns including dividends.
I may be subtly prejudiced against stocks that have rocketed up. And I certainly am skeptical of stocks that look expensive. A year ago, I said that Netflix Inc. (NFLX) and Amazon.com Inc. (AMZN) were too pricey. Yet both did well in 2016.
Sweet-Spot Selections Spice Up Annual Billion Dollar Portfolio
Posted: October 25, 2016
My Billion Dollar Portfolio won’t make you a billionaire — much as we both might like that outcome.
Rather, it gets its name from its components, a group of stocks each of which has a market value of about $1 billion. Using a range of $900 million to $1.1 billion, about 160 stocks are in that size range. About 2,000 publicly traded stocks are larger.
I like stocks near the $1 billion line because they typically haven’t been discovered by institutional investors, but they have the potential to be. I consider $1 billion to be the line between small-capitalization stocks and mid-capitalization stocks, and regard it as somewhat of a sweet spot.
That’s why I have compiled a Billion Dollar Portfolio once a year from 2001 through 2006, and from 2011 to the present. The one-year return on the 10 portfolios has averaged 17.7 percent, which compares favorably with the 11.5 percent figure for the Standard & Poor’s 500 Index in the same periods.
Seven of my Billion Dollar Portfolios have beaten the index, and eight of them have been profitable.
Lately, this portfolio has been in a slump. It has underperformed the index three consecutive years and has been unprofitable the past two times out.
Last year’s version suffered a loss of 2.5 percent, even as the S&P 500 rose 6.6 percent. The collapse of CTC Media Inc. (CTCM), a Russian media stock that I described as my most speculative pick, was too much to overcome.
Bear in mind that my column picks are theoretical and don’t involve actual trades, trading costs or taxes. Past performance doesn’t predict the future, and the record of my column selections shouldn’t be confused with my actual performance for clients.
This year’s picks
Seeking a comeback, I will offer six new selections in the Billion Dollar Portfolio.
Federal Signal Corp. (FSS) of Oak Brook, Ill., is my first pick. It makes street sweepers, vacuum trucks and other vehicles and products used by municipalities. The company suffered during the financial crisis and in its aftermath as municipal budgets were pinched. Today, towns and cities are doing better, and so is Federal Signal. Last year, it earned almost 19 percent of stockholders’ equity. Investors don’t seem convinced: The stock sells for just 1.0 times the company’s revenue.
Greenbrier Companies Inc. (GBX), based in Lake Oswego, Ore., makes railroad cars. That’s a feast-or-famine business, but I believe the next few years are likely to be good ones. An improving economy and restrained fuel costs should combine to help railroads and boost the demand for train cars. The stock seems attractively cheap at seven times recent earnings and six times the earnings expected for fiscal 2016, which ends next August.
Cray Inc. (CRAY) of Seattle makes supercomputers.
This is a fallen giant.
It once dominated the supercomputer field but now is far from the center of the action. After a skein of losses, Cray has righted the ship enough that it’s strung together five annual profits. No analyst from a major Wall Street firm follows Cray any more. Analysts from four smaller firms all rate it a “buy.” One thing I like about the company is that it’s debt-free.
Ebix Inc. (EBIX) of Johns Creek, Ga., makes software for the insurance industry in the United States, Australia, New Zealand and other countries. It has a 14-year profit streak going, but earnings growth has slowed in the past few years. Even so, its profit margin is still high and its return on stockholders’ equity last year was good — near 17 percent.
New Link Genetics Corp. (NLNK) is an early-stage biotech company based in Ames, Iowa. It started posting meaningful revenue last year — $172 million, up from slightly more than $1 million the year before. Its leading drug candidate is a treatment for pancreatic cancer, which is widely considered incurable.
I can’t handicap the chances for the drug’s approval, but it should be noted that the company is working on several other cancer drugs.
Kaman Corp. (KAMN) of Bloomfield, Conn., is a small conglomerate active mainly in aerospace components and industrial equipment such as power transmission lines and fluid flow controls. This is more of a coherent business mix than the company had in founder Charles Kaman’s day, when helicopters and guitars were the two top products.
I kind of miss the old offbeat mix, but the shares of the current Kaman look cheap to me at 0.6 times revenue.
Cummins, Deckers Among Candidates for January Bounce
Posted: November 17, 2015
Kick them when they’re down.
That’s what investors do to losing stocks at this time of year.
It’s a tax-driven phenomenon. Suppose you had losses in Micron Technologies and Hewlett Packard Co., as I do in portfolios I manage for clients. And say you had realized substantial gains during the year, as I did in United Therapeutics (UTHR) and NetEase (NTES). What would you do?
Not wanting to cost my clients unnecessary capital-gains taxes, I do what most money managers and investors do in the fourth quarter — sell some losers in taxable accounts to offset the tax on the gainers.
The effect of this seasonal tax selling is to accentuate the weakness in stocks that lost ground in the first three quarters of the year. That phenomenon can create some bargains, leading to a January rebound in stocks that have been punished excessively.
Bounce candidates
To try to determine what stocks are likely to bounce in January 2016, I used Ned Davis Research software to identify issues that:
• Are down at least 15 percent in the 43 weeks through November 13.
• Are down at least 5 percent in the 30 days through November 13.
• Sell for 15 times earnings or less.
• Have debt less than stockholders’ equity
About three dozen names popped up, from which I have selected four to recommend.
Cummins
Cummins Inc. (CMI), formerly Cummins Engine, is best known for manufacturing diesel engines. Its long customer list includes Paccar, Daimler, Ford, Volvo and many others. The company has a long history of profitability and boasts a strong balance sheet.
While the Standard & Poor’s 500 Index sells for 23 times earnings, Cummins sells for just 11 times earnings, reflecting sluggish growth the past three years. While the U.S. economy is doing well, economies in Europe are stalled out, and many emerging economies are sputtering, including China’s. Cummins gets more than half its revenue outside the United States. In a year or two, I think many of these countries will be chugging along better, at which point I expect Cummins’s stock price to be a lot higher than the present $99.
Pulte Group
Housing starts in the United States hit bottom during the financial crisis at about 500,000 a year. Today, they are running about a 1.2 million annual pace, still a far cry from the 2 million-plus totals during the boom times. I think homebuilders are on the comeback trail, but investors are skittish, remembering the housing bust of 2008-2011.
That’s why you can buy shares in Pulte Group Inc. (PHM, formerly Pulte Homes) for only 13 times earnings, even though revenue has been growing at a 13 percent clip the past three years. The stock price at about $17 has quadrupled from the 2011 bottom but is a far cry below the $46 peak achieved in 2005.
Western Digital
Skeptics say that hard disk drives are obsolete, but guess what media are used to store much of the humongous trove of date accessed through the “cloud?” That’s right, large hard disk drives. Western Digital Corp. (WDC) is one of only two major companies (the other being Seagate Technology) that manufacture hard disk drives worldwide.
It’s true that hard disk drives are being replaced by solid state drives in many applications. But through its pending acquisition of San-Disk Corp. (SNDK), Western Digital will have a decent toehold in solid state drives as well. Western Digital stock is down about 39 percent this year and sells for 11 times earnings.
Deckers
Deckers Outdoor Corp. (DECK) , the maker of Uggs boots, sports an enviable long-term growth record. Today, growth has slowed, and the stock has been punished with a 48 percent loss this year.
Warm weather (2015 may end up the warmest year on record in the U.S.) has hurt sales of winter gear, including boots. Buying Deckers shares on previous growth scares has proved lucrative, and I suspect the same will be true this time.
Past results
From 2000 to the present, I’ve written a dozen columns recommending some January rebound candidates. The average one-year return has been 8.9 percent, compared to 7.5 percent for the Standard & Poor’s 500.
Last year’s crop failed, however. As a group, they dropped 28 percent, the worst offender being Pier 1 Imports Inc., which I thought would advance because of a strong dollar. It plunged 52 percent.
Disclosure: I own Pulte Group and Western Digital personally and for most clients. I own Hewlett-Packard and Micron for many clients, Cummins and United Therapeutics for a few clients. I have no positions in the other stocks mentioned above.