Category: John’s Weekly Column
Dividends Don’t (Usually) Lie
Posted: October 02, 2024
September 30, 2024 (Maple Hill Syndicate) – Geraldine Weiss, who died two years ago at age 96, was a successful investment newsletter writer at a time when few women were prominent in finance. She wrote a book called Dividends Don’t Lie.
Weiss’s investment strategy was to invest in stocks with a dividend yield above that stock’s own historical average. It’s a contrarian strategy, based partly on the premise that the company’s stock may be temporarily depressed, pushing up the dividend yield.
Gurufocus.com, one of my favorite investment web sites, maintains a screen that looks for such stocks. Its title is “Historical High Dividend Yields.”
To qualify, a stock must have gone 15 years or more without reducing its dividend. The yield must be at least 4%. And the company must have at least $2 in profits for each dollar it pays out in dividends, reducing the risk of a dividend cut.
From that screen, I’ve selected five stocks to recommend today.
U.S. Bancorp
One of the largest regional banks, U.S. Bancorp. (USB) is based in Minneapolis, Minnesota. It maintains branches in 26 states, mostly in the Midwest and West.
The stock hit a high of $63 about three years ago, and has subsided to about $45. The Federal Reserve’s campaign in 2022-2023 to raise short-term interest rates (in an attempt to kill inflation) hurt many banks by raising what they must pay on deposits.
Now the Fed is headed the other way, and I think the banking industry will have an easier time in 2025 and 2026. US Bancorp yields 4.3% in dividends, which is about a point and a half above its normal level.
Magna International
People think of car companies as manufacturers. But to some degree, they are simply assemblers, putting together an array of sub-assemblies made by parts manufacturers.
Magna International Inc. (MGA), based in Aurora, Ontario Canada, is one of the largest auto parts companies in the world. It makes chassis, roofs, seats, electronics and other parts. General Motors, Mercedes and BMW are among its customers.
The stock is down almost 28% this year even though revenue and earnings were up. The dividend yield is 4.4%, which is almost double the 10-year median.
Walgreens
Carrying a freakishly high dividend yield of 13.6%, Walgreens Boots Alliance Inc. (WBA) is a troubled company and a potential turnaround story. The stock has descended from more than $96 a share a decade ago to barely above $9 a share now.
Back in 2014, Walgreens acquired Boots, a leading British chain. That big bite ended up giving the company indigestion. Debt has gradually grown, and now is 2.4 times the company’s net worth.
The drugstore industry has problems, including stingier reimbursement from insurers on drug sales, competition from online retailers, Walmart and Target, and a rise in merchandise theft.
Those problems seem severe but not insurmountable. The stock, pummeled badly, now sells for less than five times earnings. The sky-high current dividend yield compares with a ten-year norm of about 3.3%.
UGI
UGI Corp. (UGI), based in King of Prussia, Pennsylvania, distributes natural gas, propane and electricity, mostly in Pennsylvania and West Virginia. It also operates in eight countries outside the U.S., including Austria, France Poland and Switzerland.
The company was founded in 1882 and took its current name in 1968. The initials came from its previous name, United Gas Improvement Corp.
One of UGI’s units, AmeriGas Propane, is the largest propane marketer in the U.S.
UGI’s current dividend yield, 6.0%, is more than double its typical yield over the past ten years.
Greif
Originally known as a barrel maker, Greif Inc. (GEF.B) now makes many kinds of industrial packaging, notably steel, fiber and plastic drums. Headquartered in Delaware, Ohio, Greif now operates in 36 countries.
After a few years of mediocre profitability, Greif has posted a strong return on equity (15% or better) in five of the past six years. The dividend yield is 4.5%, compared to a ten-year median of 3.3%.
I usually include in every column how the approach I’m writing about has done in past years. I can’t do that today, as this is the first time I’ve written about the strategy of buying stocks with dividend yields above their own historical average.
I’ll let you know in a year how the stocks discussed in today’s column panned out.
Disclosure: A hedge fund I manage holds call options on Walgreens Boots Alliance. In 2007-2011, when I ran a mutual fund (Dorfman Value Fund, later named Thunderstorm Value Fund), U.S. Bancorp served as the custodian and fund administrator.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.
What is the Dow Jones Industrial Average, Really?
Posted: September 24, 2024
September 23, 2024 (Maple Hill Syndicate) – You probably hear about the Dow Jones Industrial Average every day, but how much do you really know about it?
Q. What is the Dow Jones Industrial Average anyway?
A. It’s a venerable U.S. stock-market index, that Charles Dow invented in 1896. It comprises 30 stocks, which the selection committee at Dow Jones & Co. (now part of News Corp.) considers to be leaders in their industries.
Q. Was it always 30 stocks?
A. When Charles Dow invented the index, it contained only 12 stocks. Some of the original stocks were American Cotton Oil Co., American Sugar Refining Co., Chicago Gas Co., National Lead Co. and United States Leather Co.
Many of the original 12 merged into other companies and none of them are still in the index.
Q. Are the stocks equal-weighted in the index?
A. Not at all. They are weighted according to each stock’s price. That’s because the index was created before there were computers. Charles Dow added up the 12 prices and divided by 12.
As a result of this quaint weighting system, Goldman Sachs (GS), with a stock price of $498.93 as of September 21, has about ten times the weight of Verizon (VZ), with a stock price of $44.33.
Unscientific? You bet. Most modern stocks indices, such as the Standard & Poor’s 500, are weighted according to each stock’s market value.
Q. Then why do people still pay attention to the Dow industrials?
A. Professionals mostly use the S&P 500. But the Dow carries an aura of familiarity, history and tradition. Also, it’s nice to be able to research stocks (even if in a crude fashion) before 1923 when Standard & Poor’s started to publish an index.
Q. What’s the highest weighted stock in the Dow?
A. At the moment, it is UnitedHealth Group Inc. (UNH), with a stock price of $575, giving it an 8.9% weight in the average.
Q. What’s the most lightly weighted stock?
A. Intel Corp. (INTC), priced at $21.84, for a 0.34% weight.
Q. What’s your favorite stock among the 30?
A. I think highly of JPMorgan Chase and Co. (JPM). The nation’s largest bank, headed by the capable and charismatic Jamie Dimon, should benefit as the Federal Reserve cuts short-term interest rates.
Q. What’s your least favorite?
A. Probably Boeing Co. (BA). The strike by its machinists will get resolved, but I’m more worried about the long-term fallout from the company’s recent safety failures (most notably, a fuselage panel falling off in flight).
To shore up quality and prevent future accidents, I believe Boeing will have to slow production. It will also be burdened with more federal regulatory oversight.
Q. Is the word “industrial” in the index’s title misleading?
A. A bit. For Dow index purposes, if a stock isn’t a utility or transportation stock, it’s an industrial.
Q. What is Dow Theory?
A. The theory postulates that a market advance is sustainable if, and only if, the Dow Jones transportation average (which Charles Dow invented in 1884) “confirms” a rise in the Dow Industrials.
I’m a bit skeptical of the theory. Services are now a big part of the economy, reducing the importance of transportation.
Q. How often do the components of the industrial average change?
A. In 130 years, the Dow Jones selection committee has changed the components of the average 58 times. In most cases, more than one stock was replaced. Thus, the average has 30 current members and (if my count is correct) 111 former members.
Q. What are the most recent changes?
A. This year, Amazon.com Inc. (AMZN) was added and Walgreens Boots Alliance Inc. (WBA) was dropped.
In 2020, the selection committee added Amgen Inc. (AMGN), Honeywell International Inc. (HON) and Salesforce Inc. (CRM) to the average, eliminating Exxon Mobil Corp. (XOM), Pfizer Inc. (PFE) and Raytheon Technologies Corp. (RTX).
Q. Do stocks dropped from the Dow Jones Industrial Average usually flop?
A. Not at all. In fact, during the past 25 years, stocks kicked out of the average have outperformed their replacements.
General Electric Co., which was one of the index’s original members, has revived its fortunes (and split into three successor companies) since it was booted in June 2018.
GE was replaced by Walgreens Boots Alliance, which has fallen 84% in the past five years and was itself kicked out in February 2024.
Disclosure: Personally and for clients, I own shares in Pfizer. Some of my clients own Exxon Mobil, Goldman Sachs and J.P. Morgan. A hedge fund I run has call options on Intel, RTX and Walgreens, and put options on Boeing.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.
Trader in France Scores Third Victory in Short Selling Contest
Posted: September 17, 2024
September 16, 2024 (Maple Hill Syndicate) – Laurent Condon, a professional stock trader in France, has won my annual short-selling contest for a third time.
Condon scored a 99.7% gain on his entry from a year ago, Mullen Automotive Inc., an electric car maker based in Brea, California. The stock has descended from $45 a share when the contest began to 13 cents a share as of September 13. Short sellers gain when a stock falls.
I call this contest Short Sellers Don’t Have Horns, because I believe that short sellers provide a useful antidote to the hype that surrounds some overvalued stocks.
There’s no risk in entering the contest, but in real life, short selling is a risky investment technique. In a regular purchase of stock, the maximum loss is 100% and the potential gain is unlimited. It’s the reverse with short sales: The maximum gain is 100% and potential losses are unlimited.
Condon won this contest in 2017-2018, again in 2021-2022, and yet again in 2023-2024. He has also finished second once and third once.
To boot, he has twice won honors in my traditional stock picking contest, in which the goal is to pick stocks that go up.
Danger Sign
One danger sign that motivated Condon to pick Mullen Automotive as his short is the company’s history of doing reverse stock splits – often a desperation move.
In a reverse stock split, a company shrinks the number of shares so that each share is worth more. The goal often is to meet the minimum share-price requirement for a stock exchange. From 2016 through 2023, Mullen did five reverse stock splits.
When I interviewed Condon a year ago, he was leaning toward picking WeWork Inc. (WEWKQ) as his short pick for the contest. Had he chosen it, he would still have won the contest. WeWork (a provider of shared office space) went bankrupt and the stock is now worth zero.
Condon thinks the market presently is a fertile ground for short selling because he sees “a lot of speculation.” Many investors, he says, “are kind of blind to what they are chasing, which is good for me.”
One stock (actually an exchange-traded fund) he thinks is a good short is Valkyrie Bitcoin Mining ETF. As its name implies, it invests in companies that do online “mining” of Bitcoin.
Second Place
The man who placed second in the latest contest is a stock analyst I call “Sam.” He is an analyst at an East Coast investment firm, which hasn’t given him permission to talk with the press – hence the anonymity.
Sam came in first in the contest in 2022-2023. This year he placed second with a 97.16% return on MSP Recovery Inc. (LIFW). The company tries to ferret out claims that have been paid by health insurers and should have been paid by someone else, such as car insurers or workers’ compensation.
MSP’s revenue is small and falling. It was less than $8 million in the past four quarters, down from more than $23 million in 2022. MSP Recovery did a reverse split last year, giving holders one share for each 25 shares they previously owned.
For the next contest, Sam says he would short Mullen Automotive, the same stock with which Condon won this year. Mullen’s revenue in the past four quarters was $160,000 and it has “more than $50 million a year in expenses,” Sam says.
Third Place
Third place goes Harry Feld, a retired chiropractor in Delray Beach, Florida. His short pick a year ago, ShiftPixy Inc. (PIXY) fell 93.85%.
ShiftPixy offers services such as human-resources consulting, payroll processing, and workers compensation administration to small businesses. It’s based in Miami, Florida.
“My main reason for shorting it” Feld wrote in his entry a year ago, “is that it has never made any money and it will be doing a 1-to-24 reverse split soon.”
Feld had previously taken second place in this contest in 2109-2020. He has also won honors a couple of times in my traditional stock-picking contest.
You Can Play
Would you like to try your hand at short selling, at least on paper? Enter my 22nd annual Short Sellers Don’t Have Horns contest.
It’s easy. Pick a U.S. stock you think will decline a lot from September 30, 2024 through September 12, 2025. You are not required to sell the stock short with real money, but it’s okay if you do.
Prizes are given for first place only. They all have something to do with the word “short.” Past prizes have included music by pianist Bobby Short, a strawberry shortcake, and a biography of Napoleon (a famous short person).
To enter, please submit the following:
- Your name
- Home city
- Phone number (including weekend number)
- Name and stock symbol of the stock you think will fizzle
- A brief statement of the reason you expect the stock to decline.
Entries may be emailed to jdorfman@dorfmanvalue.com or mailed to John Dorfman, Dorfman Value Investments, Suite 1900, 101 Federal Street, Boston MA 02110.
Disclosure: I have no positions in the stocks discussed in today’s column, personally or for clients.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.
Chief Executives Buy at HighPeak Energy and MRC Global
Posted: September 10, 2024
September 9, 2024 (Maple Hill Syndicate) – Jack Hightower is a well-known guy in the oil business. His company, HighPeak Energy Inc. (HPK), based in Fort Worth, Texas, is barely known by investors.
In late August and early September, Hightower spent more than $2.8 million to increase his stake in HighPeak, a company he founded. That brings the value of his total holding to about $66 million (as of Sept. 6), or close to 4% of the company’s market value.
Investors might want to pay attention to Hightower’s purchase, because he has a history of profitably selling companies he founded.
Hightower founded Titan Exploration in 1995; it later became Pure Resources Inc. In 2002 he sold Pure to Unocal.
He co-founded Celero Energy Co. in 2004 and sold it to Whiting Petroleum in 2005 for more than $800 million.
Would Hightower be willing to sell HighPeak at the right price? I don’t see why not. I imagine such a step would be several years away. Hightower, in my opinion, would be crazy to try to sell the company now.
Investors aren’t itching to invest in oil and gas at present. HighPeak traded above $30 for most of 2022. Today the shares go for less than $14. Correspondingly, a barrel of oil today fetches about $68. It sold for more than $100 a barrel in much of 2022.
I don’t think that wind and solar alone will be able to meet Americans’ demand for energy in the next five years. I expect a rebound in oil & gas, as well as nuclear energy.
HighPeak has net acreage of about 51,000 acres in west Texas and eastern New Mexico. (It’s “net” because many parcels are jointly owned.) That’s the Permian Basin, which for decades has been one of the lowest-cost places to hunt for oil and gas in the United States.
My favorite Permian play is Diamondback Energy (FANG). But I also look favorably on HighPeak shares, selling for less than 12 times the past four quarters’ earnings and only seven times estimated forward earnings.
MRC Global
Another company where the CEO has an appetite for his own stock is MRC Global Inc. (MRC). The company produces pipes, valves and fittings used in oil and gas production, especially in what the company calls “extreme operating conditions.”
MRC has shown a profit in only six of the past 10 years. If you’d held its stock for the past 10 years, you’d be sitting on a 50% loss.
Adding insult to injury, Zacks Investment Research last month published a piece on “Reasons Why You Should Avoid Betting on MRC Global.” The Zacks analysts said the company “has failed to impress investors with its recent operational performance due to weakness across its business and high debt levels.”
Is this stock a dog? The company’s president and CEO, Robert Saltiel, clearly doesn’t think so. In August he spent $240,600 to add 20,000 shares to his holdings.
That gives Saltiel a total of 790,583 shares, worth $9.6 million at the September 6 price.
The stock is fairly cheap by most of the ratios I look at. It’s particularly cheap relative to the company’s sales, clocking in at only 0.33 times sales.
Even though sales and earnings were down in the latest 12 months, Wall Street analysts are bullish on MRC. Only five analysts cover it, but four of them rate it a buy.
The initials MRC came from a merger. In 2007, McJunkin Corp. merged with Red Man Pipe and Supply Co. to form McJunkin Red Man Corp., or MRC.
Track Record
This is the 71st column I’ve written about company insiders’ buys and sells. I can tabulate one-year returns for 61 column, which includes all those written from February 1999 through a year ago.
There were 14 stocks where I noted insider buying but didn’t make a clear recommendation. Those have beaten the Standard & Poor’s 500 Total Return Index by 16 percentage points.
The stocks where I’ve noted insider selling have underperformed by a little more than two percentage points compared to the index.
Stocks that I recommended on the basis of insider buying have roughly matched the S&P 500, trailing it by two tenths of one percentage point.
Finally, there were stocks that showed insider buys, but that I said to avoid. Those have trailed 24 percentage points behind 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.
Disclosure: I own Diamondback Energy personally and for most of my clients.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.
Get a Load of the Profit Margin on These Companies
Posted: September 03, 2024
September 2, 2024 (Maple Hill Syndicate) – If a company has a fat profit margin, it’s a good sign for two reasons. Customers want its goods or services enough to pay a hefty price. And the company is not letting expenses balloon.
On the basis of their high profit margins, I recommend ON Semiconductor Corp. (ON), Martin Marietta Materials Inc. (MLM), Devon Energy Corp. (DVN), T. Rowe Price Group Inc. and Snap-on Inc. (SNA).
This is the 15th column I’ve written about companies with pleasingly plump profit margins. In 14 past years, my selections in this series have achieved an average one-year return of 17.5%. That beats the average for the Standard & Poor’s 500 Total Return Index, which was 15.8% 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.
Now, here are five new high-margin selections.
ON Semiconductor
Specializing in semiconductor chips for cars, ON Semiconductor boasts a ten-year revenue growth rate of more than 11%, and an earnings growth rate of more than 27%. It hit a bump last year, though, with both revenue and profits falling slightly.
Was that just a bump, or a wall that the company hit? Analysts are divided on that question. Of 33 analysts covering the company, 19 call it a buy, and 14 rate it a “hold” or “underperform.”
I believe that the cars of the future will need even more chips than the cars of the present. And I like ON’s net profit margin of nearly 25%. So I’m guessing that the recent slowdown was merely a bump.
Martin Marietta
There were two companies named Martin Marietta. One merged with Lockheed Corp. to form Lockheed Martin Corp., the largest U.S. defense contractor by revenue. The other, Martin Marietta Materials, is the one I’m recommending today.
The materials company, based in Raleigh, North Carolina, provides crushed stone, gravel, sand and cement. That may sound prosaic but the stock has doubled in the past five years and the company’s after-tax margin is nearly 31%.
The recent increase in federal infrastructure spending has helped this company, and I expect the favorable effects will continue for the next few years.
Devon Energy
Energy companies are said to be more “oily” or “gassy” depending on the mix of oil and gas they produce. Devon, based in Oklahoma City, Oklahoma, is relatively gassy. In the most recent quarter, its production included 29% natural gas and 28% natural-gas liquids.
Devon appears to be putting together a fourth consecutive very profitable year, after posting losses in six of the nine years preceding. I find the stock, at eight times earnings, quite attractive. The net margin lately has been above 22%.
T. Rowe Price
An investment firm specializing in mutual funds and employee-benefit plans, T. Rowe Price of Baltimore, Maryland, boasts a net margin of more than 28%. In the past five years, the stock has been a dud, sitting today slightly below where it was five years ago.
I think that financial stocks will benefit if the Federal Reserve eases interest rates over the next couple of years. Selling at less than 13 times earnings, the stock looks to me like a good bet.
Snap-on
Based in Kenosha, Wisconsin, Snap-on Inc. provides repair tools and software to auto shops. It works on a franchise system. Franchisees buy a red-and-white truck from Snap-on, along with gear to fill it. Then they distribute it to gas stations and other auto-repair shops.
The franchisees make about $60,000 to $130,000 a year, according to third-party reports. Snap-on itself made a little over $1 billion in the past four quarters, on revenue of roughly $5 billion.
Some people figure that the advent of electric cars will hurt the company, since electric cars have fewer parts than gasoline-powered cars. My view is that car repairers will need both kinds of tools for the next five years or more.
Last Year
My fat-margin stocks enjoyed a bigger lead over the S&P 500 before the past year. My picks in 2023 were a disaster.
They fell 7.5%, even as the S&P 500 rose 26.9% with dividends reinvested. None of my picks did especially well. The worst performers were Livent Corp. (now part of Arcadium Lithium PLC) and Utah Medical Products Inc. (UTMD), both down close to 24%.
The crummy performance was all the more disappointing because it followed a very good one in 2022-2034, when my fat-margin selections returned 32.94%.
Disclosure: I own Snap-on personally and for most of my clients. Some clients own ON Semiconductor.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.
Harris, Trump and the Future of Corporate Taxes
Posted: August 27, 2024
August 26, 2024 (Maple Hill Syndicate) – Kamala Harris and Donald Trump will clash over corporate tax rates in the next two months.
As President, Trump pushed for lower corporate tax rates and got them. In 2017, Congress slashed the corporate tax rate to 21% from 35%.
Corporate tax as we know it today was born in 1909. The rate has been as low as 1% in 1910, and as high as 52.8% in 1968. According to the IRS, the average rate from 1909 to 2024 has been 32.08%.
In 2022 under President Joe Biden, Congress passed the Inflation Reduction Act, which mandated that large corporations pay at least a 15% rate regardless of how many deductions and credits they have.
Trump says he will try to lower corporate taxes further. Harris proposes raising them to 28%.
Yet, judging by the campaign contributions I’ve looked at, corporate executives appear to be leaning more toward Harris than Trump.
Here’s a look at four prominent corporations’ tax rates, their political contributions in the 2023-2024 election cycle, and my opinion of their stock.
I chose these four companies because they were featured in a Fortune magazine article in 2022 about companies that “paid next to nothing — or nothing at all – in taxes in 2021.” Since then, their taxes have gone up, at least in part because of the Biden minimum.
Amazon
Amazom.com Inc. (AMZN) paid less than 19% in corporate taxes in four of the past five years. It paid a bundle (54% of pretax profits) in 2022, however.
Individuals associated with Amazon have given $438,360 to the Harris campaign, according to the web site Open Secrets, which tracks political contributions and lobbying expenditures. They have given only $102,292 to the Trump campaign.
Contributions by Amazon.com as a corporation to political action committees (PACs) have been fairly small and about evenly split between Democrats and Republicans.
Amazon.com stock is expensive, selling for 42 times recent earnings and nearly eight times book value (corporate net worth). I’m a cheapskate, and wouldn’t buy it. But most analysts would. Of 60 analysts covering the stock, 59 rate it “buy” or “outperform.”
Dare I go against so much expert opinion? You bet. A study I do each January tracks the fate of the stocks most loved by analysts and the stocks most despised by them. Universal love for a stock is not a good sign. The adored stocks have performed worse than the Standard & Poor’s 500 Total Return Index.
Exxon
At Exxon Mobil Inc. (XOM), the tax rate has been running at around 29% lately.
According to Open Secrets, entities affiliated with Exxon Mobil have given about $155,000 this year to the National Republican Senatorial Committee and the National Republican Congressional Committee, and $32,500 to the Democratic Senatorial Campaign Committee.
Individuals associated with Exxon Mobil have given $37,678 to Trump and $22,849 to Harris, the website says.
The stock, selling at 14 times earnings and a little less than two times book value, seems attractive to me. I think the transition to solar and wind energy will be a long one and fossil fuels will continue to be important at least into the 2030s.
AT&T
AT&T’s tax rate lately has been about 21%, and it hasn’t been higher than that since 2015.
Tabulations by Open Secrets show that AT&T has given more money to PACs supporting Democrats (about $350,000) than Republicans (about $225,000). Individuals associated with AT&T have given $119,341 to the Harris campaign and $68,371 to the Trump campaign.
The stock? It pays a sweet dividend, with a yield of 5.6%. But it hasn’t been a great investment, as it’s lost 25% over the past five years. The company’s debt load is larger than I prefer.
Microsoft
At Microsoft Corp. (MSFT), the tax rate recently has been about 18%, and hasn’t been above 19% since 2018.
Individuals associated with Microsoft have given $1.1 million to the Democratic National Committee Services Corp. and the company has given $15,000 to it. Individuals at the company have given $120,215 to the Republican National Committee.
Individuals associated with Microsoft have given $580,872 to Harris, versus $81,706 for Trump.
Microsoft is a profit powerhouse. Its operating profit margin is close to 45%. Return on stockholders’ equity is very high, about 37%.
Arguably, that makes the stock worth its current valuation of 35 times earnings and more than 11 times book value. It’s not my cup of tea to “pay up for quality” but I understand why many people do so.
Disclosure: I own Exxon Mobil stock for some clients. My wife, who is a portfolio manager at my firm, owns Microsoft shares personally and for clients; I own it for one client.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.
Capital One and Tutor Perini Look Good on Price-to-Cash-Flow
Posted: August 20, 2024
August 19, 2024 (Maple Hill Syndicate) – An old joke has a chief executive asking his accountant how much the company earned in the latest quarter. “How much did you want it to be?” the accountant replies.
There’s always a bit of judgment that goes into financial figures. I’m a fan of GAAP earnings – profits measured by generally accepted accounting principles. But some investment professionals think cash flow is a truer measure.
Cash flow tries to measure the actual money going into a corporation and coming out. It disregards interest, taxes, depreciation and amortization because these may not involve current cash inflows or outlays.
In picking stocks, cash-flow fans focus on the stock’s price divided by the company’s cash flow per share. Once a year, I single out a few stocks that look good to me on that measure. Here are five that look appealing now.
Capital One
Take a bank, put it in a space that looks more like a coffee shop, and you have the basic idea of Capital One Financial Corp. (COF). Its slogan is “What’s in your wallet?” True to the slogan, it does a large business in credit cards.
Over the past ten years, Capital One has increased profits at a 10% annual clip. Last year was tough, with profits up only 1.5%. But I think the next couple of years will be easier, now that the Federal Reserve seems ready to reduce short-term interest rates.
Capital One shares sell for only 2.3 times operating cash flow, a very low ratio. (Here, lower is better.)
RPC
Disliked on Wall Street is RPC Inc. (RES) of Atlanta. It provides oilfield services such as pressure pumping and well control. Profits have been erratic, with six profitable years and four unprofitable ones in the past decade.
Why would I like such an erratic earner? I think drilling activity over the next five years will be busier than many people think. And RPC’s balance sheet is a thing of beauty, with debt equal to only 3% of stockholders’ equity (corporate net worth). The stock trades for 6.8 times operating cash flow.
Tutor Perini
Based in Sylmar, California, Tutor Perini Corp. (TPC) is an engineering and construction company. It builds everything from casinos to bridges to airline terminals.
Right now, it is benefitting from increased federal spending on infrastructure. After a decade of slowly declining revenue, it saw sales perk up 11% in the past year. Of nine analysts who cover the stock, seven like it.
Tutor Perini shares go for a mere 2.8 times operating cash flow, and only 0.25 times the company’s revenue per share.
Cleveland-Cliffs
Cleveland-Cliffs Inc. (CLF) gets about two thirds of its revenue by making flat-rolled steel, and about one third by mining iron ore. Its stock has been flattened this year as the steel industry has slowed down. Analysts expect the company to report a small loss for 2024.
I think that investors have punished this stock a little too harshly. The company is expected to be profitable again in 2025 and 2026. The stock, at $12 to $13 per share, fetches only three time operating cash flow.
International Seaways
Revenue and earnings fell in the past year at International Seaways Inc. (INSW). Houthi militants are firing on ships passing through the Suez Canal, forcing ships to go around Cape Horn instead – a longer and costlier trip.
At the same time, drought is disrupting operations in the Panama Canal. All this is unpleasant for International Seaways, which operates 82 ships carrying oil and other cargo. Buying stocks on bad news that is real but temporary is one of my favorite investment techniques.
The stock trades for about 4.2 times operating cash flow.
Performance Record
Since 1999, I’ve written 20 columns about stocks with low price to cash flow ratios. (Today’s is the 21st.) The average one-year return on my selection in this series has been 13.8%, compared to 10.4% for the Standard & Poor’s 500 (dividends included).
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 have been profitable 14 times out of 20, but have beaten the S&P 500 only half the time.
Last year the index thrashed me. It surged 28.10% while my choices rose only 11.5%. Cal—Maine Foods Inc. (CALM) did very well, but I had only modest gains in BlueLinx Holdings Inc. (BXC) and Peabody Energy Corp. (BTU). I had losses on Andersons Inc. (ANDE) and Berry Corp. (BRY).
Disclosure: I own Cal-Maine Foods personally and for most of my clients.
John Dorfman is chairman of Dorfman Value Investments in Boston. He can be reached at jdorfman@dorfmanvalue.com. He or his clients may own or trade stocks discussed in this column.
If Only Ben Graham Could Speak to Us
Posted: August 13, 2024
August 12, 2024 — (Maple Hill Syndicate) – I wish we could bring Benjamin Graham back to life for a strategy huddle.
Graham (1884-1976) was a hedge-fund manager, author and Columbia University professor. He is widely considered the father of value investing (essentially bargain hunting).
His style, to which I am an adherent, did well for most of eight decades but has struggled in the 16 years since the Great Recession. What would Graham say if he could talk with us now? I suspect he would say to keep the faith, as cheap stocks will perform well in the long run.
Each year I pick a few stocks that I believe the master might buy if he were alive today.
15.5% Average
My “Graham picks” last year rose only 9.0%, trailing behind the Standard & Poor’s 500 Total Return Index at 20.8%. Dragging down the return was a 14% loss in Seaboard Corp. (SEB). The best performer was U.S. Steel Corp., up 33%.
Over 21 years, my Graham-inspired selections have returned an average of 15.5%, including dividends. That beats the average return on the S&P 500 for the same periods, which was 11.9%.
My attempts to channel the ghost of Graham have beaten the index 14 times out of 21, and have also been profitable 14 times.
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.
We can’t, alas, bring the real Ben Graham back to life, but, using a simplified version of his criteria, here are a few stocks I believe he might like today.
Each of these stocks sells for 12 times the company’s per-share earnings or less. The average stock currently sports a multiple of about 24.
Each has debt less than 50% of corporate net worth (the average is more than 100%) and a stock price less than book value, or corporate net worth (the average is about two times book).
Unum Group
I’ll start with Unum Group (UNM) a specialist in disability insurance. I chose it as a Graham selection in 2022 and it rewarded me with a 30% return. Today, I again think that the maestro might like it, as it is selling for a mere eight times earnings, and has debt only 33% of corporate net worth.
Fake or questionable claims often plague disability insurers during recessions. Who knows when the next recession will come. But despite recent fears, I’m not expecting one soon.
Bank OZK
Bank OZK (OZK) is a regional bank with headquarters in Little Rock, Arkansas, and offices in eight states.
Many people would view Bank OZK as a risky investment, for a couple of reasons. It has a good chunk of commercial real estate loans, and the troubles of office buildings in the Covid and post-Covid era are well known. Also, the bank has expanded into new territories and new types of loans.
I think that Graham might find these risks acceptable. The stock sells for seven times earnings and debt is only 16% of corporate net worth.
G-III Apparel
G-III Apparel Group Ltd. (GIII), based in New York City, makes clothing under the Calvin Klein, Donna Karan, DKNY, Karl Lagerfeld and Tommy Hilfiger brands, plus a variety of private labels. It has been profitable in 14 of the past 15 years.
The “rag trade” is known for slim profit margins, but G-III’s margin is not bad, 5.8% after taxes. A number of money managers I respect own the stock, including Caxton Associates, Jeremy Grantham, Joel Greenblatt and Chuck Royce.
Peabody Energy
Investors scorn coal companies because coal is a high-polluting fuel and coal mining companies have spotty earnings history. However, I believe that the rising demand for electricity from data centers will extend the viability of coal companies into the 2030s.
One of the largest is Peabody Energy Corp. (BTU). Peabody posted six losses in the past ten years, but has a three-year profit streak going. Analysts expect the company to be profitable in 2024, 2025 and 2026. The stock sells for six times earnings and the company’s debt is low.
HF Sinclair
Refining is a cyclical business, but HF Sinclair Corp. (DINO) has managed 13 profits in the past 15 years, and has been nicely profitable lately. The advent of electric cars is a threat to refiners (who will sell less gasoline) but not an imminent threat in my opinion.
I think Graham would like the price/earnings ratio of seven, and the dividend yield of 4.1%.
Disclosure: I don’t personally own the stocks discussed in today’s column. I own Bank OZK shares for one client.
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.
The Sane Portfolio Cruises into Its 23rd Year
Posted: August 12, 2024
August 5, 2024 — (Maple Hill Syndicate) – Some people want to invest in the stock market, but don’t want to be too daring.
For the slightly conservative investor, I compile a collection of stocks that I think may be suitable. I call it the Sane Portfolio.
There are a dozen stocks in this portfolio, and I refresh the membership list once a year. To get in, a stock must meet seven criteria, described below. Once in, a stock stays in unless it flunks one of the seven criteria.
Over 22 years, the Sane Portfolio has averaged an 11.4% annual return. That is slightly better than the Standard & Poor’s 500 Total Return Index, with an average return of 10.3%.
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.
In the past 12 months, the Sane Portfolio chalked up a 17.06% return, which trailed the index at 20.09%. The star performers were Mueller Industries Inc. (MLI), up 72%, and Encore Wire Corp. (WIRE), which advanced 70% and was acquired. The worst performer was Archer-Daniels Midland Co. (ADM), down 30%.
Eligibility Hurdles
To be eligible for the Sane Portfolio, a stock must leap seven hurdles. None is especially difficult by itself, but few companies can jump all seven.
The hurdles are:
- Market value of at least $1 billion.
- Debt less than stockholders’ equity.
- Return on stockholders’ equity of 10% or better.
- Stock price less than 18 times per-share earnings.
- Stock price less than 3 times per-share sales.
- Stock price less than 3 times book value (corporate net worth per share).
- Five-year earnings growth averaging 5% per year or better.
This year, eight “Sane” companies retain their eligibility, leaving four vacant spots to fill.
Winning Streaks
D.R. Horton Inc. (DHI), the nation’s largest homebuilder, is back for a fifth year. Right now, the number of homes being sold is low, but the average selling price is high, about $487,000. If mortgage rates come down a peg or two, we should see a jump in home sales.
Back for a fourth year is Nucor Corp. (NUE). A pioneer in recycling, it’s the largest U.S. steel company. Over the past decade Nucor has increased its revenue at better than a 10%-a-year clip.
Also a four-timer is Paccar Inc., which manufactures heavy trucks under the Kenworth and Peterbilt brands. Paccar owns about 30% of the U.S. heavy-truck market, second only to Daimler-Benz Group of Germany, which makes the Freightliner brand.
Three Timers
Entering its third year is Mueller Industries Inc. (MLI), which makes metal and plastic parts such as rods, tubes, valves and refrigerator coils. It has shown a profit in each of the past 30 years (also true of Paccar). Mueller has barely any debt.
Boise Cascade Co. (BCC) also returns for a third year. It produces engineered wood products, plywood and lumber products. If the housing industry improves in the next year or two, that will help Boise.
Back for Seconds
Archer-Daniels Midland Co. (ADM), an agricultural-products processor, returns for a second year. This is a low-margin business, but the stock currently trades at 0.34 times the company’s sales, which is a bit cheaper than usual.
Also back for seconds is W.R. Berkley Corp. (WRB), the only financial stock on this list. It’s a property and casualty insurer that has posted a return on stockholders’ equity of 15% or better four years in a row.
Fertilizer maker CF Industries Holdings Inc. (CF) completes the list of returnees. It had a rough year last year but managed to stay on the roster.
Newcomers
No longer eligible are Amkor Technology, which was in the portfolio for three years, Columbia Sportswear Co., which was in for two, and Coterra Energy Inc. (CTRA), which lasted only one. In addition, Encore Wire was acquired, creating a fourth vacancy.
Since Coterra fizzled, the portfolio has no energy stocks. I’m inserting EOG Resources Inc. (EOG), a big oil-and-gas producer with lots of Texas acreage.
The list currently has no retailers. Enter Academy Sports & Outdoors Inc. (ASO), which sells sporting equipment, mainly in the South and Midwest.
The Sane Portfolio is also naked in the technology area, now that Amkor has fallen out. (Many tech stocks sell for more than 18 times earnings.) In goes Photronics Inc. (PLAB) of Brookfield, Connecticut. It makes photomasks, used in making integrated circuits and flat screen displays.
For my final pick, I’ll go with Monarch Casino & Resort Inc. (MCRI), which has grown its revenue at an 8% annual clip for the past decade.
Disclosure: I own D.R. Horton and Nucor for one or more clients. I own Amkor Technology in my hedge fund.
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.
A Scorecard on Women as Chief Executive Officers
Posted: July 30, 2024
July 29, 2024 (Maple Hill Syndicate) – If Kamala Harris becomes President, she will break the ultimate glass ceiling.
Other glass has already been shattered. About a quarter of U.S. senators are women, as are roughly a quarter of the nation’s governors. Women sit in the chief executive’s chair at about 10% of the corporations in the Fortune 500.
Judging the performance of a senator or governor is subjective. For chief executive officers (CEOs), there are some fairly standard objective criteria.
For this column, I looked at the performance of ten women at the helm of large Fortune 500 companies, using three criteria:
- Return on equity (the company’s profits divided by the corporation’s net worth) in the latest four quarters.
- Earnings (profit) growth in the latest year.
- Performance of the company’s stock in the latest year.
Here’s a quick rundown, company by company, followed by some dangerous generalizations. (Dangerous, because the sample size is small and the time frame is only one year).
CVS
Karen Lynch took the reins at CVS Health Corp. (CVS) in 2021. She owns about $26 million of CVS stock, which has declined 18% in the 12 months through July 26. The company’s return on equity is 9.9%, and profits have fallen 18.7% in the past four quarters.
Elevance
At Elevance Health Inc. (ELV), previously known as Anthem, Gail Boudreaux has occupied the corner office since 2017. Elevance has scored a 16.7% return on equity, and its stock price has advanced 12% in the past year. Earnings were up 5.4%.
General Motors
Mary Barry has run General Motors Co. since 2014, making her one of the longer-tenured women CEOs of major companies. GM’s return on equity in the past year has been 16% and its stock is up 15%. Earnings improved 9% in the past year.
Centene
At Centene Corp. (CNC), Sarah London has been CEO since 2022. The St. Louis, Missouri, company specializes in health insurance for Medicaid and Medicare patients. The stock is up 7% in the past year and the return on equity is 10.6%. Profits grew 12.7% in the past four quarters.
United Parcel
Most people driving United Parcel Service Inc. (UPS) trucks are men, but the boss is a woman, Carol Tome. She has held the post since 2020. The company notched a 29% return on equity last year, even as its stock fell 31%. Earnings fell 35%, as the effects of the pandemic on package deliveries faded.
Citigroup
Jane Fraser has been CEO of Citigroup Inc. (C) since 2021. The big bank was struggling before she took over and continues to do so, with a return on equity of only 4%. Earnings fell 32% in the past four quarters, but the stock has risen 37% over the past year.
Best Buy
At retailer Best Buy Inc. (BBY), Corie Sue Barry grabbed the chief executive spot in 2019. Return on equity is very high at 42.6%, but the stock has gained just a little over 5% in the past year. Earnings fell 3.7%.
Progressive
Susan Patricia Griffith been CEO of Progressive Corp. (PGR) since 2016. Progressive saw a huge increase in profits in the past four quarters, 465%. The stock is up 71% in the past year and the company’s return on equity was recently 34.6%.
Oracle
Safra Catz took over the top post at Oracle Corp. (ORCL) in 2014, making her an old timer as women CEOs go. Oracle’s numbers are very strong, with a 241% return on equity, a 59% jump in profits in the past year, and stock appreciation of 30%.
General Dynamics
The longest tenure in this group belongs to Phebe Novakovic, CEO of the big defense contractor General Dynamics Corp. (GD). She got the post in 2013. In the past four quarters, the company posted a 17% return on equity and earnings growth of 5.3%. Its stock has risen 30%.
Analysis
The companies I tracked with women CEOs showed average one-year earnings growth was 51.5%, thanks largely to Progressive and Oracle. That’s far better earnings growth than that of the Standard & Poor’s 500, which was about 11.6% from June 2023 to June 2024.
The S&P had a better return on equity, about 21%, thanks mostly to the big tech stocks in the so-called Magnificent Seven. The female-CEO companies averaged about 17%.
In stock-market performance, the S&P held the edge, with a 21% return in the past year, versus 15.4% for the ten companies with female CEOs.
Clearly, a woman can successfully run a large corporation. The stock market, however, seems to have a slight bias in favor of male CEOs.
Disclosure: I own General Dynamics shares personally and for most of my clients. My wife (a portfolio manager at my firm) and several of our clients own Progressive. One client owns shares in United Parcel.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.