Bunny Portfolio Slump Persists for 2nd Year
Posted: December 13, 2016
Oh my poor little bunny! For the second year in a row, my Bunny Portfolio lost money while the overall market gained.
Despite that setback, this little rabbit boasts a good long-term record, up an average of 17.0percent in fifteen annual outings while the Standard & Poor’s 500 Index is up an average of 5.7 percent.
This hypothetical portfolio is named after the Energizer Bunny, featured in once-popular TV commercials for batteries. The bunny that was “still going” long after you would have expected it to run out of juice.
That is the concept behind my Bunny Portfolio. It contains stocks that achieved 25 percent earnings growth or better the past five years, yet sell for a modest 12 times per-share earnings or less.
You see that combination if investors believe that a company’s past success has ended, or is about to end. However, people are bad at predicting the future. Therefore, I reason that some of these stocks will be “still going” long after the majority expects their good fortune to end.
To narrow the field to 10 stocks, I select the five with the fastest earnings growth rates, and the five with the cheapest price/earnings ratios.
Bunny History
I don’t use judgment in choosing the Bunny stocks, except in setting up the selection paradigm. The actual selections are made by a computer program. In recent years, I’ve been using a stock screening program from Ned Davis Research Inc.
I started this hypothetical portfolio in December 1999 and have published it every December since then, with the exceptions of 2007 and 2008, when I was temporarily retired as a columnist.
In 15 attempts, the Bunny has shown a profit 11 times and beaten the S&P 500 Index eight times.
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.
Last year the Bunny flopped instead of hopped. With big losses in Federated National Holdings Co. (FNHC), a Florida insurer, and Lannett Co. (LCI), a generic drug company, the portfolio dropped 7.3percent while the S&P 500 returned 11.0percent.
New Bunny Selections
This year’s Bunny Portfolio includes two hotel stocks, both of which are real-estate investment trusts. Hersha Hospitality Trust (HT), based in Philadelphia, owns all or part of 55 hotels in major U.S. cities. It yields 5.1 percent in dividends.
Sunstone Hotel Investors Inc. (SHO) owns 28 hotels, mostly branded as Hilton, Hyatt, Marriot or Fairmont. The company has been slowly cutting its dividend since 2013, and appears to be straining to pay the current dividend.
Analysts foresee a big slowdown in the hotel industry next year. But with the economy heating up I think they may be too pessimistic.
The portfolio also includes a pair of airlines. Hawaiian Holdings Inc. (HA), provides air service to and from Hawaii. Like all airline, it has benefitted from industry consolidation and falling fuel prices. Those propellants might be exhausted now. United Continental Holdings Inc. (UAL), one of the largest U.S. airlines, faces similar issues.
More Bunny Babies
Cincinnati Bell Inc. (CBB)is back in the Bunny Portfolio for a second year. Earnings have been sporadic lately and analysts foresee worse ahead. However, the analysts were also gloomy a year ago, yet the stock produced a 13 percent gain.
Equity Residential (EQR)is a Chicago-based real estate investment trust run by the legendary Sam Zell, now 74. It owns 315 apartment buildings, mostly in New York, Boston, Washington DC, Seattle, San Francisco and Southern California.
Gilead Sciences Inc. (GILD) has a rich line-up of drugs and a robust pipeline. The fly in the ointment is that insurers and government are getting more and more reluctant to pay for expensive medicines.
Gladstone Investment Corp. (GAIN) is a small closed-end fund containing private equity investments. Closed-end funds resemble mutual funds but have a fixed number of shares and trade like stocks.
Natural Health Trends Corp. (NHTC), out of Rolling Hills Estates, Calif., sells nutritional supplements, vitamins, and herbal products by direct selling and on the Internet. After several years of losses, it has shown very high profitability in recent years. The company is debt-free.
New Home Co. (NWHM) is a smallish California home builder. I like the industry but don’t know the company well. The stock trades for 13 times recent earnings but only nine times estimated 2017 earnings.
Tower International Inc. (TOWR), makes car frames and other auto parts. The stock is dirt cheap at less than four times earnings. The auto industry has seen a big recovery since 2009 but of course it is, and always will be, cyclical.
Disclosure: One of my clients owns shares in Lannett.