D.R. Horton and Brooks Automation Show Value Plus Momentum
Posted: August 31, 2020
August 24, 2020 (Maple Hill Syndicate) – Looking for a stock that’s on the move, but isn’t too expensive?
I have a few to suggest.
The four stocks I am recommending today all sell for 15 times earnings or less, and have advanced at least 21% in the past three months, which is ten percentage points better than the Standard & Poor’s 500 Index.
I could kick myself. Early in the current recession, I sold homebuilder D.R. Horton Inc. (DHI), reasoning that it got murdered in the last recession (2007-2009) and would at least be hurt in this one.
What I missed is that the pandemic might actually spur demand for houses, since suburban living is more conducive to social distancing than city living is. Also, if one might be forced to work at home, the choice of home becomes even more important.
So, contrary to my expectations, D. R. Horton has done just fine, up 45% in the past three months, beating the Standard & Poor’s 500 index by about 34 percentage points. Horton shares are still reasonably priced, at 14 times earnings.
Up 28% in the past three months is Templeton Dragon Fund (TDF), a closed-end investment fund that normally invests about 45% in China, 20% in Japan, and 35% in various other Asian countries. It has averaged better than 16% annual total return in the past five years.
Unlike mutual funds, which are their cousins, closed-end funds trade on an exchange just like stocks, and may sell at a premium or discount to the value of their holdings. Templeton Dragon usually sells for a discount, currently a little wider than usual at about 16%.
Michael Lai has run this fund for about 15 years. The expense ratio is 1.35%, which is a little high for people (and there are many) who are fanatics about preferring low expense ratios. Personally, I think that consideration is overblown.
Although based in Denver, Colorado, Alacer Gold Corp. (ALACF) mines for gold mainly in Turkey. It is in the process of merging with SSR Mining Inc. of Vancouver, Canada, which has mines in Nevada, Canada and Argentina.
The merger is billed as a merger of equals. The company will keep the SSR name, but headquarters will be in Denver, Alacer’s home. Rod Antai, CEO of Alacer, will be the CEO.
Alacer shareholders will get 0.3246 shares of the new SSR for each Alacer share held. Collectively, they will own 43% of the new company.
I like the merger because it gives the combined company greater geographical diversity. I see some political risk in Turkey, which has touchy relations with the U.S.
I expect gold to do well because of central banks are printing money copiously, U.S.-China relations are tense, and real interest rates are low.
Many aspects of semiconductor manufacturing require vacuum chambers or clean rooms. Brooks Automation Inc. (BRKS), based in Chelmsford, Massachusetts, provides equipment to create these conditions, and also provides other equipment to the semiconductor industry.
The semiconductor equipment industry is notorious for boom and bust cycles. However, Brooks have managed to increase its book value (corporate net worth per share) by about 8% a year over the past five fiscal years, and 7% over the past ten years.
Brooks has debt equal to only 7% of equity, an admirable ratio that could prove invaluable if the nation goes through a longer and tougher recession than many people currently anticipate. The stock is up close to 27% in the past three months, and sells for only about eight times earnings.
Beginning in 2000, I’ve written 37 columns (including today’s) on stocks that possess both value and momentum. The average 12-month return on my recommendations in this series is 11.8%, a couple of points better than the 9.4% average for the Standard & Poor’s 500. One-year returns can be calculated for 35 columns.
Of the 35 columns, 25 were profitable and 18 beat the S&P 500.
My picks from a year ago returned 23.3%, thanks to good gains in Bio-Rad Laboratories Inc. (BIO, up 54%) and Pulte Group Inc. (PHM, up 48%). Auto Nation Inc. (AN) also had a gain, but Allstate Corp. and Micron Technology Inc. declined. Collectively my picks beat the S&P 500, which was up 18.0%.
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.
Disclosure: A fund I manage owns call options on Micron Technology.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.