Graco and A.O. Smith Boast High Profit, Low Debt

Posted: June 11, 2024

By John Dorfman

June 10, 2024 — (Maple Hill Syndicate) – Two qualities of outstanding companies are high profitability and low debt. Let’s look at a handful of companies that can boast both.

Among the largest 2,000 U.S. companies, about 27% have high profitability, as gauged by a return on stockholders’ equity of 20% or more. About 15% of companies have low debt, which I define as debt no more than 10% of stockholders’ equity.

Putting those two qualities together is much harder. Fewer than 3% of companies can claim both badges of honor.

Here are five of them that I believe deserve consideration in many people’s portfolios.

Graco

Based in Minneapolis, Minnesota, Graco Inc. (GGG) makes fluid-handling systems and products. Russell Gray, then a parking lot attendant, founded the company in 1926, initially producing grease guns and paint pumps. Gray Company became Graco in 1969, and went public the same year.

Today the company makes sprayers, devices to paint lines on roads, foam and polyurethane equipment, lubrication systems, sealants and all kind of pumps. Its return on equity the past four quarters was 23%, and debt is only 2% of equity.

A.O. Smith

You may have an A.O. Smith Corp. (AOS) boiler or water heater in your basement, heating your house or providing you with hot water for showers. You may not give the company much thought. But it’s quite a successful company, with a 31% return on equity and debt only 8% of equity.

The Milwaukee, Wisconsin company has been profitable in each of the past thirty years. As best I can tell, it hasn’t had a loss year since the Great Depression in the 1930s. Over the past decade it has increased its profits by an average of 12% a year.

Mueller Industries

For the third year in a row, I recommend Mueller Industries Inc. (MLI). It returned 62% and 38% in the first two outings. For the coming year, I anticipate a more modest, but still good, return.

Lately Mueller has posted a 25% return on equity while holding debt down to 1% of equity. Based in Collierville, Tennessee, the company makes metal and plastic fittings such as refrigerator coils. It has reported a profit in each of the past 30 years.

Normally you have to pay up for a stock with this sort of record. But Mueller is pretty cheap, selling for 11 times earnings.

Warrior Met Coal

Warrior Met Coal Inc. (HCC) has found a nice niche, mining hard coking coal (used in producing steel) in Alabama and exporting it to Latin America. Its return on equity lately has been running at 29%, and has exceeded 20% in five of the past seven years.

The company was founded in 2015 and has its headquarters in Brookwood, Alabama. It took over the assets and mines of Walter Energy Inc., which went bankrupt that year. Debt now is only 9% of equity. Coal is not a trendy industry, but you’re not paying as if it were. The stock trades at only eight times earnings.

Axcelis Technologies

Based in Beverly, Massachusetts, Axcelis Technologies Inc. (ACLS) makes ion implantation equipment and other equipment used in making semiconductor chips. The vast ecosystem that makes up the semiconductor industry is prospering because of increasing use of artificial intelligence.

Axcelis has a 31% return on equity of late, and carries debt equal to only 5% of equity. The company mostly posted losses until 2015 but has increased its earnings at better than a 50% annual clip the past five years.

The Record

From 2000 to the present, I’ve written 19 columns on companies with high profit and low debt. (This is number 20.) The average 12-month return on my selections in this series is 11.3%, which narrowly beats the 10.5% average return on the Standard & Poor’s 500 Total Return Index over the same periods.

Thirteen of the 19 columns have shown a profit, and 10 of them have beaten the benchmark.

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.

A year ago, I highlighted five stocks in this paradigm. Mueller Industries did best, up 38%. Cal-Maine Foods (CALM) also did well, returning 26% including dividends. Diodes Inc. (DIOD) was a loser, dropping 23%. Moderna Inc. (MRNA) returned 17%, and Civitas Resources Inc. (CIVI) was up 4%.

Altogether, my 2023 picks returned 12.6%, trailing the S&P 500 Total Return Index at 23.0%.

Disclosure: I own Warrior Met Coal in a hedge fund I run. I own Cal-Maine Foods personally and for most of my clients.

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.

Four CEOs Who Bought Their Own Stock in May

Posted: June 04, 2024

By John Dorfman

June 3, 2024 — (Maple Hill Syndicate) – Defying bad news, several chief executive officers bought their own companies’ stock last month. Here are four cases that caught my eye.

At Skyworks Solutions Inc. (SWKS), CEO Liam Griffin spent just over $1 million to buy 11,142 shares. That brings his total holding to 153,431 shares, worth more than $14 million as of May 31.

A semiconductor maker, Skyworks specializes in chips for mobile devices, especially smartphones. Its customers have included Apple Inc. (AAPL), Amazon.com Inc. (AMZN) Samsung Electronics Co., and Microsoft Corp. (MSFT).

Apple is the biggest customer, and Skyworks has been criticized for over-dependence on Apple. That’s a valid criticism, but far from a fatal one in my view.

Skyworks has grown its revenue at an 11.6% annual clip in the past decade. But in the past year, revenue fell (coincidentally) 11.6%. Investors have to gauge which result is more indicative of the future.

Griffin is apparently on the optimistic side of that choice. He has been with Skyworks for many years and has frequently sold shares acquired as executive compensation. Last month’s buy was his first open-market purchase since 2006.

Skyworks stock seems reasonably priced at 15 times the earnings analysts expect for the fiscal year in progress.

Globe Life

Globe Life Inc. (GL) shares took a 53% dive on April 11, on a negative report by Fuzzy Panda Research. Fuzzy Panda, which held a short position in the stock (betting on a decline) alleged that Globe was guilty of insurance fraud.

Fuzzy Panda alleged that Globe Life has sold life insurance policies to dead people and fictitious people. It also alleged that Globe Life executives secretly had an ownership stake in Xcel Testing, and directed recruits to Xcel to prepare for licensing examinations.

Globe Life responded that Fuzzy Panda’s report was “wildly misleading” and painted a picture of the company that “is deliberately false.” It said the report “mischaracterizes facts and uses unsubstantiated claims and conjecture.”

The company has co-CEOs, James Darden and Frank Svoboda. Both of them bought shares in May, as did two other company executives. In addition, four directors bought shares in April, about two weeks after the short seller’s attack.

Bloomberg News on April 12 described Fuzzy Panda as “an anonymous organization”. I’m skeptical that the short seller’s attack is accurate. Accordingly, I think the stock is a speculative buy, but I wouldn’t put more than 1% of your portfolio in it.

Globe Life shares fell from more than $120 early this year to just below $50 when the short seller’s report hit. It has climbed back to about $83.

Oxford Lane

Oxford Lane Capital Corp. (OXLC) is a closed-end investment company that invests in collateralized loan obligations. CEO Jonathan Cohen spent $25 million in May to greatly increase his stake. President Saul Rosenthal made an identical investment.

These two executives are attempting to shore up a company that has posted four losses in the past ten years. The dividend yield is gigantic, at about 17% a year, and dividends are paid monthly. A dividend that large is a danger sign, but may also be an opportunity.

Acacia Research

Acacia Research Corp. (ACTG) is bafflingly diverse for a small company. One segment makes printers and supplies for industrial printing. Another explores for and produces oil and gas. A third acquires and manages patents.

The company has lost money in six of the past ten years. Over that time, the stock has lost 65% of its value. Nonetheless, CEO Martin Mcnulty and general counsel Jason Soncini bought shares in May. These were the first insider buys since 2021.

The Record

The column you’re reading is the 70^th one I’ve written about insider purchases and sales. I’m missing some data for the first six, but can tabulate 12-month results for 60 columns – all those from 1999 through a year ago.

The stocks I’ve recommended based on insider buys have beaten the Standard & Poor’s 500 Total Return Index by an average of 0.4 percentage points.

When insiders bought, but I suggested avoiding the stock, the average result trailed the S&P 500 by 24 percentage points.

On stocks where I discussed insider sales, the average result was two percentage points below the index.

On a few stocks, I noted buying by company executives but made no comment or an ambiguous one. Perversely, this group beat the benchmark by 16 percentage points.

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.

Disclosure: I own Apple personally and for most of my clients. Katharine Davidge, my wife and a portfolio manager at my firm, owns Microsoft personally and for her clients.

My “Do Nothing” Stocks Have Averaged a 14% Return

Posted: May 28, 2024

By John Dorfman

May 27, 2024 — (Maple Hill Syndicate) – Investors often chase stocks that have soared or plunged. They may overlook stocks that have simply held still.

But there are sometimes real bargains in stocks that have done nothing for a while. Each May I write about such stocks. I call them the Do Nothing Club.

Over 20 years, my Do Nothing stocks have averaged a one-year return of 14.0%. That nicely beats the average for the Standard & Poor’s 500 Total Return Index over the same periods, which has been 9.9%.

I also calculate three-year returns on the Do Nothing stocks. Those have averaged 38.0%, versus 26.8% for 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.

Why have these stocks done well? Perhaps stocks that show little price movement cease to be followed closely by investors and analysts. That leaves room for surprises, in some cases pleasant surprises.

These results are consistent with a study I commissioned from Mitchell & Co. long ago (when I was a Wall Street Journal reporter). It found that stocks on the new-highs list and stocks on the new-lows list both underperformed. Hurray for the neglected middle.

Here are five new Do Nothing stocks that look good to me. Each of them has a total return within six percentage points of zero in the 12 months through May 24, and also in the past month.

Cisco Systems

Cisco Systems Inc. (CSCO) is still the largest computer-networking company in the world, although a variety of companies including Arista Networks Inc. (ANET) and Hewlett Packard Enterprise Co. (HPE) are nipping at its heels.

In the ten years through March 2000, Cisco shares appreciated almost fifty-fold. Alas, those heady days are long gone. But the company has a net profit margin near 22%, and a return on stockholders’ equity near 27%. I think it’s a good buy at the recent price of about $46.

Schlumberger Ltd.

If you want to drill an oil well and you need sophisticated seismic data and mapping of hydrocarbon deposits, Schlumberger Ltd. (SLB) is one of the few companies that can help you. It was founded in France, and is incorporated in the Netherlands Antilles, but has its headquarters in Houston, Texas.

Schlumberger’s return on stockholders’ equity recently has been a highly respectable 22%. But the stock sells for only 15 times earnings, which is the territory I like as a value investor.

Sabine Royalty

If you can stand some complication of your tax return, I think Sabine Royalty Trust deserves consideration. It gets income from oil and gas properties in six states (Florida, Louisiana, Mississippi, New Mexico, Oklahoma and Texas), and passes the money to shareholders as dividends.

The dividend yield currently is more than 9%, and the five-year dividend growth rate is 20%. If you invest, you will receive a form K-1 each year and hand it over to your tax preparer.

Banner

Banner Corp. (BANR) is the holding company for Banner Bank, based in Walla Walla, Washington. A poisonous condition for banks is an inverted yield curve – that is, a situation in which short-term interest rates are higher than long-term ones. That condition has prevailed in the U.S. for nearly two years.

I’m starting to look at bank stocks now, because I hope that the yield curve will un-invert by the end of this year, if and when the Federal Reserve decides to lower short-term rates. I like this particular bank stock because it sells for less than 10 times earnings, and yields more than 4% in dividends.

PayPal

Over the past decade, PayPal Holdings Inc. (PYPL) has grown its sales by more than 17% a year, and earnings at better than a 14% clip. Its return on equity lately has been running at about 19%.

With that record of success, I’m a little surprised to find the stock trading at less than 16 times earnings. Over the past decade its price/earnings multiple has averaged more than 46.

Last Year

Last year was a satisfying one for my Do Nothing stocks. Collectively, my five picks advanced 44.3%, led by an 80% gain in Photronics Inc. (PLAB). Acuity Brands Inc. (AYI) and Dillard’s Inc. (DDS) also did well, rising 68% and 65% respectively.

My worst pick was Littelfuse Inc. (LFUS), which lost 2%. Alliance Bernstein LP (AB) was a laggard, rising 9%. For comparison, the Standard & Poor’s 500 Total Return Index notched a 30% advance.

Disclosure: I own Arista Networks personally and for most of my clients. I own Acuity Brands for one client.

Your Portfolio is a Garden. Weed It.

Posted: May 22, 2024

By John Dorfman

May 20, 2024 — (Maple Hill Syndicate) – I don’t believe in the old stock-market saying “Sell in May and Go Away.” In my opinion, you should never “go away” from the stock market altogether. But May is a good time to weed out your portfolio.

Unless you have a strong reason to do otherwise, I would:

Sell any stock you’ve held for three years with no price appreciation.
Sell any stock whose price is 60 times per-share earnings or more.
Sell the stock of any company that has posted losses in the past year, unless you have a reasonable basis to believe it will be profitable soon.
Take a hard look at any stock that has declined 20% or more from the purchase price. Ask yourself whether the original purchase rationale still holds.

Here are a few large, widely held stocks that I would consider selling now.

MicroStrategy

MicroStrategy Inc. (MSTR), a Tysons Corner, Virginia company headed by Michael Saylor, sells software for enterprise analytics and mobility. But the stock doesn’t trade based on that business.

It trades based on the company’s holdings of bitcoin. MicroStrategy owns some 214,000 of the crypto tokens. That is more than 1% of the 19.7 million bitcoins that have been issued so far. It’s about 1% of the 21 million coins that will ultimately be issued.

As of May 19, one bitcoin cost $66,934.60. So 214,000 of them would be valued at $14.3 billion. That is about half the market value of MicroStrategy stock.

MicroStrategy has financed its cryptocurrency purchases in large part by issuing notes convertible to common stock. So the current stockholders are at risk of seeing the value of their holdings diluted.

The company has posted a loss in three of the past four years.

Carlyle Group

Carlyle Group Inc. (CG), with headquarters in Washington D.C., is one of the larger private equity firms in the U.S. Such firms invest in private companies or take public companies private. They often cut costs, try to enhance revenue, and then take the companies public in a few years.

The acquisitions are usually done with borrowed money, and the cost of borrowing money has risen a lot in the past year.

The stock seems expensive to me at 12 times the company’s revenue. Revenue has declined over the past year, five years and ten years.

Cytokinetics

Muscular diseases are the focus at Cytokinetics Inc. (CYTK), a biotechnology firm based in South San Francisco, California. It is working on treatments for amyotrophic lateral sclerosis (Lou Gehrig’s disease), heart failure and several other conditions.

The company has posted losses in 13 of the past 15 years. Its liabilities currently exceed its assets by about $396 million. A clinical research breakthrough could prove me wrong, but I think the stock is overvalued at the current market capitalization of of $6.2 billion.

Boeing

In the past few years, Boeing Co. (BA) planes have experienced two controversial crashes and one notorious door-panel blowout. The company will have to spend more on safety and redundant quality checks. This will slow down production and dampen sales, I believe.

Boeing has liabilities of $151.5 billion and assets of $134.5 billion. Of the past ten years, only five have been profitable.

Lyft

Lyft Inc. (LYFT) plays second fiddle to Uber Technologies Inc. (UBER) in the U.S. ride-hailing market, with $4.4 billion in revenue last year, compared to Uber’s $37.3 billion. While Uber turned profitable in 2023, Lyft has yet to show an annual profit, although analysts expect to see one this year.

To me it is a cautionary sign that Lyft’s debt is more than twice the company’s equity.

The Record

I offer sell recommendations once a year in this column, usually in May. My “sells” from a year ago trailed the Standard & Poor’s 500 Total Return Index by ten percentage points, rising 18.4% while the index climbed 28.42%.

Clorox Co. (CLX) declined 14%. Colgate-Palmolive Co. (CL) and Keurig Dr. Pepper Inc. (KDP) rose, but less than the benchmark. International Business Machines Corp. (IBM) and Salesforce Inc. (CRM) beat the index, with gains of 38% and 36% respectively.

Longer-term results are mixed. My sell recommendations have trailed behind the index 10 times out of 16 – as they should. However, due to bad picks I made in 2005 and 2010, the average return on my sells has been 13.0%, while the S&P has averaged 12.2%.

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.

Disclosure: A hedge fun I manage owns put options on Boeing.

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.

Nvidia was Key to Success in my Stock-Picking Derby

Posted: May 15, 2024

By John Dorfman

May 13, 2024 — (Maple Hill Syndicate) – You had to pick Nvidia.

To do well in my latest annual stock-picking contest, Dorfman’s Three-Stock Derby, it helped immensely if Nvidia Corp. (NVDA) was one of your selections. Six people chose it as one of their three picks, and each of them finished among the top ten contestants.

Harriet Ruben, a retired real estate broker from Fairlawn, Ohio, won the latest contest with an 88.7% return. She scored a 144% gain in Nvidia, 96% in Meta Platforms (META), and 26% in Microsoft Corp. (MSFT). All figures are total returns including dividends.

These are popular, large-capitalization growth stocks, which are the type of stocks that Ruben favors in her actual investing. She says she has a large portfolio, which includes each of her three contest entries, plus Apple Inc. (AAPL), Netflix TK (NFLX) and quite a few other stocks.

Ruben says she listens to corporate chief executives who are interviewed on television, then follows up with statistical research on her broker’s web site. “I look for the next ‘best thing,’” she says.

Beaten Down

Using quite a different approach, Ted Dempsey of Virginia Beach, Virginia, grabbed second place in the Derby. He is 87 years old, a retired Navy officer and consultant. No longer an active investor, he liked to “speculate on stocks that are beaten down in price.”

For his contest entries last May, he chose Robinhood Markets Inc. (HOOD), Lyft Inc. (LYFT) and PacWest Bancorp, which was acquired by Banc of California Inc. (BANC). His average return on the three was 76%.

Dempsey says he was able to retire mostly because of a big gain on his investment in Labor Ready Inc., now known as TrueBlue Inc., an industrial staffing company. “I happened to know the two founders of Labor Ready,” he says. “I was probably excessive in buying it but I got very lucky.”

Bitcoin Surge

Robert “B.K.” Krout of Virginia Beach finished third with a 75.8% return. His return came on the strength of a 298% surge in Grayscale Bitcoin Trust ETF (EBTC); his other two picks declined.

Krout is a retired mechanical engineer and a volunteer with the Sierra Club Offshore Wind Group. He believes that Bitcoin prices tend to follow a pattern: “a low period for a year or so before demand and price rise again.”

Ironically, crypto currencies play only a small role in Krout’s real-life investing. He owns some Bitcoin and some Ethereum, but regards them as “speculative” and limits his crypto exposure to about 2% of his total portfolio.

His other two contest picks for 2023-2024 were Albemarle corp. (ALB) and Pfizer Inc. (PFE). He continues to like them, and also likes a number of big technology names.

Wide Spread

This year there was a huge dispersion of contestants’ results. Of the 34 people who entered, nine had returns of 50% or better, while 11 had losses. The worst loss was 39%.

The median return for contestants was 20.0%. That was close to the return on the Standard & Poor’s 500 Total Return Index, which was 20.2%.

You Can Play

You are welcome to enter the next edition of Dorfman’s Three-Stock Derby, which will be the 17^th such contest I have hosted. To enter, please email or mail me the following items:

Your name
Your Address
Your Occupation
Your Email address
Your home and work phone numbers.
The names and stock symbols of the three stocks you choose. You don’t have to give your reasoning but I appreciate it if you do.

Email me your entry at jdorfman@dorfmanvalue.com. Or mail it to John Dorfman, Dorfman Value Investments, 101 Federal Street, Suite 1900, Boston MA 02110.

Entries must be postmarked or time stamped by midnight May 31, 2024. The contest period will be from the market close on that date through the close on April 30, 2025.

If you finish in the top three, I will want to interview you on short notice and possibly on a weekend, so the phone numbers are vital.

You do not need to own the stocks you select, but it’s fine if you do. Stocks must be traded in the U.S., but need not necessarily be U.S. companies. Short sales are permitted but not encouraged, since I have a separate short-selling contest. Exchange traded funds (ETFs) are permitted.

There is no fee to enter. The winner will receive a $100 gift certificate to the restaurant of her or his choice.

Disclosure: I own Apple and Pfizer personally and for most of my clients. Other managers at my firm own Nvidia and Microsoft.

Five Low-Debt Stocks for the “Higher for Longer” Era

Posted: May 07, 2024

By John Dorfman

May 6, 2024 — (Maple Hill Syndicate) – Jerome Powell, head of the Federal Reserve, made it official a few days ago. “Higher for longer” interest rates are the policy of the nation’s central bank, and that’s likely to last for at least several months.

The cost of carrying debt is now biting companies harder than it did in the past half-a-dozen years. So it makes sense to look at low-debt stocks.

Frankly, I prefer low debt in any environment. But when borrowing money is cheap, high-debt stocks sometimes frolic. In my view, that time has passed.

Here are five companies that have little or no debt, and whose stocks I suggest for serious consideration.

Cognizant

Cognizant Technology Solutions Corp. (CTSH), based in Teaneck, New Jersey, is an information technology (IT) services provider. It provides outsourced IT services, and also consults with companies to improve their in-house tech operations.

Among the companies it serves (or has recently served) are Comcast, JP Morgan, Walgreens and Walmart. About 70% of Cognizant’s employees are in India, where skilled labor is cheaper than in the U.S.

Over the past decade, Cognizant’s revenue has climbed about 10% a year. Profits have grown more slowly, about 6% a year. The company has shown a profit every year for 26 years. Debt is only 10% of stockholders’ equity.

Incyte

A pharmaceutical company that concentrates on cancer treatment, inflammation and autoimmunity, Incyte Corp. (INCY) has been profitable in only seven of the past ten years. Usually I prefer a little more consistency, but I feel positive about this company, whose debt is only about 1% of equity.

The company develops drugs, markets some of them itself, and assigns marketing rights to others (typically with larger pharmaceutical firms). Over the past ten years, Incyte’s revenue growth has averaged 21% a year. The company has dual headquarters in Wilmington, Delaware and Geneva, Switzerland.

Mueller Industries

I’ve recommended Mueller Industries Inc. (MLI) several times in this column. It’s a metal-bender, perhaps best known for making refrigerator coils. But its product line is diverse, including such things as rods, valves, tubing and coaxial heat exchangers.

The company hails from Collierville, Tennessee, and has posted a profit in each of the past 30 years, including the recession year of 2008 and the pandemic year of 2020. Debt is only 1% of equity, and the company has more than $39 in cash for each dollar of debt.

Cal-Maine Foods

There’s no debt whatever at Cal-Maine Foods Inc. (CALM) of Ridgeland, Mississippi. It’s the largest U.S. egg producer, with roughly 20 million laying hens.

One might think that eggs would be a steady business but, alas, that’s not so. The prices that Cal-Maine can get at the grocery store vary over time, but a bigger variation is in costs. When the price of chicken food (mainly corn) rises, costs go up. Results are also affected when avian flu hits the flocks.

So, profits vary a lot from year to year. Unlike many companies, which smooth out their dividends, Cal-Maine raises its dividend in good times and cuts it in bad. Currently, the dividend yield is 3.3%. It has ranged from negligible to 11%.

Alpha Metallurgical

Yes, coal is a dying industry – for better or for worse. But it won’t die fast. U.S. energy needs continue to grow, thanks partly to power-guzzling data centers. Coal remains an important source of electrical power and is also necessary for the production of steel.

Alpha Metallurgical Resources Inc. (AMR), based in Bristol, Tennessee, mines coal in Virginia and West Virginia. The stock sells for less than seven times earnings, and the company’s debt is less than 1% of equity.

The Record

This column is the 22^nd one I’ve written about low-debt stocks, beginning in 1998.

My picks in the first 21 columns have chalked up an average 12-month return of 24.8%. That is far above the average return on the Standard & Poor’s 500 Total Return Index for the same periods, which was 11.1%.

Fifteen of my 21 sets of recommendations have been profitable, and 13 have beaten the S&P 500.

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 16.8%, but failed to beat the benchmark, which zoomed ahead 25.8%. My best pick was Teradyne Inc., up 32.3%. My worst was Moderna Inc., down 5.1%.

Let’s see if my new crop can make some money and beat the index.

Disclosure: I own Cal-Maine Foods shares personally and for most of my clients.

Ron Baron and Bill Ackman Are Performance Leaders

Posted: April 30, 2024

By John Dorfman

April 29, 2024 (Maple Hill Syndicate) – The website Gurufocus.com tracks the stock picks and performance of a few dozen famous investors. In the past five years, half a dozen of them had annual returns exceeding 17%.

Ron Baron leads the parade. His Baron Partners Fund had a 31.2% annual return.

In today’s column, we’ll take a peek inside the portfolios of Baron and the other five investors who have had the hottest hands the past five years. One caution: Investment success can appear or vanish in a flash.

My mentor David Dreman, for many years a successful mutual-fund manager, once said to me, “John, I’m so tired of being a genius one year and an idiot the next – and with the very same stocks.”

Ron Baron

Ron Baron is the founder of Baron Capital Management in New York City. His firm manages about 19 mutual funds, with assets totaling about $37 billion.

As of December 31, Baron’s biggest holding by far was Tesla Inc. (TSLA), Elon Musk’s electric-car company. Since that date, the stock has slid 32%. I don’t know if Baron has trimmed his holdings or added to them. But he tends to hold stocks for the long haul.

Investors are deserting Tesla stock in droves because the company’s sales and earnings – which had been on a steady upward course – declined in the March quarter. The stock peaked at $409.97 in November 2021. It now (as of April 26) sells for about $168.

I wouldn’t count Elon Musk out, but Tesla stock is still too expensive for me at 43 times earnings.

Among Baron’s other holdings were Gartner Inc. (IT), a technology consultant; Co-Star Group Inc. (CSGP) a real-estate information firm, and Arch Capital Group ltd. (ACGL), a Bermuda-based insurance and reinsurance firm.

Bill Ackman

The founder of Pershing Square Capital Management, Bill Ackman is an activist hedge-fund manager. He usually holds relatively few positions, and often presses for strategic changes at the companies in which he invests. Gurufocus.com gives his five-year return as 20.4% per year.

As of December 31, his biggest holding was Chipotle Mexican Grill Inc. (CMG). He bought it in 2016 when the stock was depressed by a food poisoning (E-coli) problem affecting the restaurant chain. Buying on bad news takes guts, but is often a path to profits.

Other major holdings for Ackman were Restaurant Brands International Inc. (QSR), Hilton Worldwide Holdings Inc. (HLT) and Howard Hughes Holdings Inc. (HHH).

Bruce Berkowitz

The managing member of the Fairholme Fund, Bruce Berkowitz can boast a 19.3% annual return over the past five years.

His biggest holding is St. Joe Co., the largest land owner in Florida, which he has held for about 15 years. He is the company’s largest stockholder and a member of its board of directors.

St. Joe owns about 171,000 acres in Florida (mostly the Northwest coast), and has been gradually building hotels and residential developments on some of its acreage. It also has some medical properties, including Sacred Heart Hospital in Santa Rosa Beach.

Elfun Trusts

I’ll skip over Elfun Trusts fairly quickly, because it is a fund in which only General Electric employees and trustees can invest. The five-year return, per Gurufocus.com, is 17.8% a year. The largest holdings are Microsoft Corp. (MSFT), Apple Inc. (AAPL), Amazon.com Inc. (AMZN) and Nvidia Corp. (NVDA).

Harbor Capital

Spiros Segalas ran the Harbor Capital Appreciation Fund (HACAX) for 33 years until his death in early 2023. Now it’s run by a team at Jennison Associates. The annual return has averaged 17.5% over the past five years.

Its four biggest holdings are precisely the same as those at Elfun Trusts (though not in the same order). Some other holdings include Eli Lilly and Co. (LLY), Visa Inc. (V), Broadcom Inc. (AVGO) and MasterCard Inc. (MA).

David Rolfe

David Rolfe is the longtime portfolio manager at Wedgewood Partners, which posted a 17.3% annual return over the past five years. He runs a concentrated portfolio, and looks for companies with high profitability and a product or service that is “practically irreplaceable.”

As of December, his top positions were PayPal Holdings Inc. (PYPL), Edwards Lifesciences Corp. (EW) and Visa Inc. (V), followed by Alphabet Inc. (GOOG) and Texas Pacific Land Corp. (TPL).

Should you buy the stocks these celebrated investors hold? Not necessarily. Today’s resident of the investment penthouse may be tomorrow’s occupant of the investment outhouse.

Still, when a manager compiles an outstanding record over a meaningful period, his or her investment choices deserve research and consideration.

Disclosure: I own Alphabet and Apple personally and for clients. Another manager at my firm owns Microsoft and Nvidia; and a third has a short position in Tesla (betting on a decline). One of my clients owns Eli Lilly.

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.

Old Faithful Erupts …. With Five Stock Picks

Posted: April 24, 2024

By John Dorfman

April 22, 2024 (Maple Hill Syndicate) – You can count on it. Every 35 to 120 minutes, Old Faithful Geyser will erupt in Yellowstone National Park.

I’ve named one of my favorite stock screens after this famous geyser. It’s a simple multi-factor screen, pointing to stocks that:

Boast a 15% return on stockholders’ equity (profits as a percentage of corporate net worth) or better.
Have debt less than stockholders’ equity.
Sell for 15 times earnings or less.
Sell for two times book value or less.
Have grown earnings at a 10% annual clip for the past five years.

I feature a few stocks from Old Faithful once a year in this column. Here are my five for the coming year.

Lennar

Many investors are terrified of homebuilding stocks. Houses are expensive and mortgage rates are high. So how, skeptics ask, can anyone afford a newly built home?

I think the skeptics will prove wrong, because I believe there is a lot of pent-up demand for single-family homes. I expect sales to surge if and when mortgage rates come down a peg or two. I like many of the homebuilders, including Lennar Corp. (LEN), one of the largest ones.

Lennar is based in Miami, Florida, and sells homes in 26 states. It concentrates on medium priced-homes; its average selling price is a little over $400,000. Its shares trade at less than 11 times earnings, which I consider cheap. Its five-year earnings growth rate is above 28%.

Agco

Based in Duluth, Georgia, Agco Corp. (AGCO) makes tractors under given brand names, notably Massey Feguson. It also manufactures other agricultural equipment, such as grain handling machines, and sells a wide variety of farming supplies through 3,100 dealers worldwide.

Agco’s latest two fiscal years were the company’s best since 2011. Analysts expect the next two years to be moderately less profitable. As a result the stock sells for less than eight times recent earnings, in contrast to an average valuation of just over 15 times earnings in the past decade.

I think the stock is a bargain now.

Hibbett

A smaller stock I like is Hibbett Inc. (HIBB) which runs the Hibbett chain of sporting goods stores – some 1,158 stores in 36 states. The stock went public in 1996 and the company has shown a profit every year since, even though there have been three recessions during that time.

Hibbett’s return on equity has exceeded 20% in eight of the past 12 years. I consider 15% good and 20% excellent.

Analysts expect Hibbett’s profits to be fairly flat for the next three years. Hence, the stock sells for less than nine times earnings.

I had also selected Hibbett a year ago, and since then it returned 26%, including dividends.

Farmers & Merchants

A nearly debt-free choice is Farmers & Merchants Bancorp (FMCB), based in Lodi, California – not to be confused with more than a dozen banks that have similar names. On its web site, the bank said it is the “largest community bank lender to agriculture west of the Rocky Mountains.”

The bank has 32 locations, all in California. It is a “dividend king,” having increased its dividend to shareholders for 50 years or more – in this case, 58 years. Like Hibbett, this is a repeat pick from a year ago.

Arrow Electronics

Arrow Electronics Inc. (ARW), with headquarters in Centennial, Colorado, was founded in 1935 as Arrow Radio. It sells a wide variety of electronic parts to corporate customers. With some 125,000 customers, it’s not excessively dependent on one or two of them.

Nine analysts follow Arrow, and only four recommend it. The problem is that distributors have small profit margins, and Arrow is no exception, with an after-tax margin of 2.7%. Nonetheless, it has grown its earnings at a 15% annual clip for the past decade.

The Record

Starting in 1999, I’ve written 21 columns featuring some picks from the Old Faithful screen. (This is the 22^nd.)

The average 12-month return has been 20.5%, more than double the 7.9% return for the Standard & Poor’s 500 Total Return Index over the same periods.

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 Old Faithful picks have beaten the index 16 times out of 21, and have been profitable 15 times.

My selections from a year ago returned 34.2%, versus 22.0% for the S&P. The most successful pick was Matson Inc., up 63.9%. The dud was Farmers & Merchants Bancorp, which was up only 1.3%.

Disclosure: I own Agco and Matson personally and for most of my clients.

Five Candidates for a Small-Stock Comeback

Posted: April 16, 2024

By John Dorfman

April 15, 2024, (Maple Hill Syndicate) – Waiting for small stocks to stage a comeback is like:

(a) Watching grass grow

(b) Watching paint dry.

(d) All of the above.

The answer of course is (d). This year through April 12, large-capitalization stocks (as represented by the Standard & Poor’s 500 Total Return Index) have risen 7.86%. Small-capitalization stocks (measured by the Russell 2000 Index with dividends reinvested) have declined 0.8%.

As a small-cap fan, I wish that were an anomaly. Alas, it’s not. Large-cap stocks have beaten small-caps eight of the past 10 years, including the past three years in a row.

Generally, large-cap stocks are more international, more stable, and have a fatter cushion against setbacks. But I’m fond of the small-caps, which are often more innovative, quicker to change strategy when needed, and less covered by Wall Street.

I feel that individual investors have a better chance to find undiscovered gems among the small fry.

Here are five small-cap stocks I like now.

Dorian

Dorian LPG Ltd. (LPG) owns a fleet of 22 ocean tankers for transporting liquefied petroleum gas (mainly propane and butane) internationally. It has a spotty earnings history but has been racking up strong profits the past two years. Its net profit margin recently was 55%.

Most Wall Street analysts give Dorian a tepid “hold” rating. But I think the stock is attractive at nine times estimated earnings for the fiscal year that recently started.

Photronics

Hailing from Brookfield, Connecticut, Photronics Inc. (PLAB) makes photomasks, which are used in manufacturing integrated circuits and flat-panel displays. Only three Wall Street analysts cover it, and only one of them recommends it.

The stock looks appealing to me, nonetheless. Earnings were up 24% in the past year, and have averaged a 19% annual increase over the past decade. The stock sells for 12 times earnings, or about half the ratio for the median stock these days.

International Money

International Money Express Inc. (IMXI) helps people from Latin America who are working in the U.S. to send money home. The company has more debt than I normally prefer, but has grown its earnings more than 23% per year over the past five years.

The company uses Latin American retail stores as its agents, giving them a cut of fees. It says that its price point is higher than Western Union (WU) or MoneyGram, but that its service is better and its app easier to use.

Some people may shy away from this stock, reasoning that Donald Trump, if elected President again, may choke off immigration from Latin America (both legal and illegal). I don’t know who will win the election, but I think the forces behind Latin American immigration are strong and will persist.

Quanex

Quanex Building Products Corp. (NX), with headquarters in Houston, Texas, makes windows, doors and other building products. It has shown a profit in eight of the past ten years.

In one of those paradoxes in which Wall Street abounds, most analysts foresee fairly flat earnings ahead and their average price target for the stock is only $38.50, compared to an April 12 price of $35.87. Yet four of the five analysts who cover the stock recommend it.

I’m a bit more optimistic than the analysts, mostly because I think that interest rates (including mortgage rates) may come down a peg or two fairly soon.

John B Sanfilippo

Nuts, anyone? John B. Sanfilippo & Son Inc. (JBSS) processes peanuts, almonds, cashews and other nuts, and sells them under both its own brands (Fisher, Orchard Valley Harvest, Sunshine Country) and as house brands. It has a 15-year profit streak going, and has grown earnings at an 11% annual clip over the past decade. It’s almost completely ignored by Wall Street.

The Record

Over the years, I’ve written 26 columns recommending a few small-cap stocks. The average one-year return (including dividends) has been 16.2%. That compares with 8.5% for the Standard & Poor’s 500 Total Return Index and 10.3% for the Russell 2000 Index of small-caps.

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 doubled the Russell index but just edged out the S&P, 25.7% to 25.4%. Warrior Met Coal Inc. (HCC) was the best performer, up 66.6%. Intrepid Potash Inc. was the worst, down 25.8%.

Disclosure: I own International Money Express and John B. Sanfilippo personally and for most of my clients. I own Warrior Met Coal in a hedge fund I manage.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts. His firm or clients may own or trade securities mentioned in this column. He can be reached at jdorfman@dorfmanvalue.com.

Cisco Systems and ON Semiconductor Make the 30-30 Club

Posted: April 09, 2024

By John Dorfman

April 8, 2023 (Maple Hill Syndicate) – My 30-30 Club has gotten even more exclusive. This is an honor roll for corporations, named after the 30-30 Club in baseball.

The baseball version is for players who have hit 30 home runs and stolen 30 bases in the same season. Willy Mays, Barry Bonds and Mike Trout leap to mind.

My version is for corporations. To make this roster, a company has to grow its profits at a 30% clip for five years, and achieve a 30% return on stockholders’ equity.

This year only 27 companies made the cut, down from 38 a year ago and 47 the year before. Pretty soon, the club will need a red velvet rope to keep out the riff-raff.

All these companies deserve to be honored. But some of their stocks are expensive. Others carry more debt than I like. Each year, I recommend only a few of the qualifying stocks. This year I recommend five of them.

Cisco Systems

Cisco Systems Inc. (CSCO), based in San Jose, California, is a leading player in the computer-networking market. The stock has fared poorly in the stock market for the past five years, even while the company’s sales and earnings increased. The company has been profitable 22 years in a row.

ON Semiconductor

Specializing in computer chips for cars, ON Semiconductor Corp. (ON) has increased its profits by 44% a year in the past five years. Growth flagged last year, but profits were still impressive. The stock sells for 14 times earnings, while the median large-cap stock sells for a multiple of about 24.

Axcelis

While ON makes chips, Axcelis Technologies Inc. (ACLS) makes equipment used in making chips. One of its main products is ion implantation equipment, which fine-tunes the electrical conductivity properties of parts of the silicon in the chip. This stock can also be had for 14 times earnings.

Atkore

Atkore Inc. (ATKR), based in Harvey, Illinois, is a mid-sized industrial company that makes electric conduit, fittings and cables. It also slits and cuts structural steel sheets.

While the five-year numbers are strong, last year was weak—which is why the stock goes for only 11 times earnings.

Builders FirstSource

I think there is a lot of pent-up demand in the United States for single-family homes. Mortgage rates, recently an obstacle to home ownership, may come down a bit in the second half of this year. So I like Builders FirstSource Inc. (GLDR), which supplies things like wall panels, stairs and frames.

Honor Roll

The other 22 members of the 30-30 Club deserve to be honored, whether I happen to like their stocks or not.

The largest are Deere & Co. (DE), Chipotle Mexican Grill Inc. (CMG), Autodesk Inc. (ADSK), Microchip Technology Inc. (MCHP) and First Citizens BancShares Inc. (FCNCA).

Other large companies that qualify are Deckers Outdoor Corp. (DECK), Williams-Sonoma Inc. (WSM), Dick’s Sporting Goods Inc. (DKS), Medpace Holdings Inc. (MEDP), Insulet Corp. (PODD), Kinsale Capital Group Inc. (KNSL) and Lattice Semiconductor Corp. (LSCC).

In the mid-size range we have Murphy USA Inc. (MUSA), AutoNation Inc. (AN), Boyd Gaming Corp. (BYD), Sunoco LP (SUN), Herc Holdings Inc. (HRI), InterDigital Inc. (IDCC) and PJT Partners Inc. (PJT). Only companies with a market value of $2 billion or more were eligible for consideration.

Previous Picks

A year ago I recommended five of the 30-30 stocks: Merck & Co. (MRK), Nucor Corp. (NUE), Encore Wire (WIRE), Super Micro Computer Inc. (SMCI) and Coterra Energy Inc. (CTRA).

Collectively, these five stocks rose 185% from April 10, 2023 through April 5, 2024, thanks to a 789% gain in Super Micro, which rode a wave of investor mania about artificial intelligence.

Encore Wire advanced 67% and Nucor returned 38%, both beating the Standard & Poor’s 500 Total Return Index at 29%. Trailing the index were Merck (up 17%) and Coterra (up 14%).

Of the five stocks I chose last year, only Super Micro returns to the 30-30 list this year. After the stock’s huge gain, it’s too expensive for me at 74 times recent earnings. But my wife, Katharine Davidge, who is a portfolio manager at my firm, owns it personally and for some clients.

Full Record

I’ve written about the 30-30 Club most years since 1999. My 19 sets of recommendations have averaged a 19.1% return (including dividends) over twelve months. The Standard & Poor’s 500 Total Return Index has averaged 8.7% over the same periods.

My picks have beaten the S&P 500 12 years out of 19, with 12 profits and seven losses.

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.

Disclosure: I own Merck personally and for most of my clients. I own Encore Wire and Nucor personally and for some clients.

Graco and A.O. Smith Boast High Profit, Low Debt

Four CEOs Who Bought Their Own Stock in May

My “Do Nothing” Stocks Have Averaged a 14% Return

Your Portfolio is a Garden. Weed It.

Nvidia was Key to Success in my Stock-Picking Derby

Five Low-Debt Stocks for the “Higher for Longer” Era

Ron Baron and Bill Ackman Are Performance Leaders

Old Faithful Erupts …. With Five Stock Picks

Five Candidates for a Small-Stock Comeback

Cisco Systems and ON Semiconductor Make the 30-30 Club

Archive of Articles

Recent Articles