Dorfman: Perfect 10 Portfolio Has Just Enough Sizzle
Posted: July 07, 2015
The movie “10” was considered quite racy when it came out in 1979. In it, Bo Derek starred as a “Perfect 10.”
My Perfect 10 Portfolio may not sizzle like Ms. Derek, but it has provided some excitement and good times over the years.
The selection method for the Perfect 10 Portfolio is simplicity itself. I choose 10 stocks, each of which sells for a price/earnings (P/E) ratio of about 10. The P/E ratio is a stock’s price divided by per-share earnings for the past four quarters.
A ratio of 10 is below average, and that’s the whole point. Buying stocks that are out of favor — as evidenced by a low P/E — is the heart of my investment approach. Unpopular stocks stand a better chance of exceeding prevailing expectations than popular stocks do.
In a typical year, the average stock sells for about 15 times earnings. Today, the average P/E is near 21.
How It’s Worked
I have compiled this portfolio 12 times since 2000; today’s column is the 13th. In the previous 12 tries, my average 12-month return has been just over 21 percent, compared with a smidgen over 9 percent for the Standard & Poor’s 500 Index.
Ten of the 12 columns have been profitable, and eight have beaten the S&P 500.
Bear in mind that returns on my column recommendations are hypothetical and don’t reflect actual trades, trading costs or taxes. Past performance doesn’t predict future results, and the performance of my column picks shouldn’t be confused with returns I achieve on behalf of clients.
Last year’s selections managed a 12.6 percent return versus 7.9 percent for the S&P. The best performers were TRW Automotive Holdings Corp. (then a U.S. stock, now TQT on the Frankfurt stock exchange), up 41 percent, and China Mobile Ltd. (CHL), up 35 percent.
The worst performers were Statoil ASA (STO), down 39 percent, and Gazit-Globe Ltd. (GZT), up 5 percent.
10 New Ones
Now for this year’s Perfect 10 Portfolio.
American International Group (AIG) is a worldwide insurance company that was near the heart of the financial crisis of 2007-09. Today, it is run more conservatively. The stock sells for below book value (corporate net worth per share) and is heavily owned by Bruce Berkowitz, a manager I respect.
Avnet Inc. (AVT), an electronics distribution company in Phoenix, was on this list before, in 2006-07, when it posted a 138 percent gain. I don’t expect that kind of fireworks again, but I like Avnet’s high market share in its business: It is one of the two biggest players, the other being Arrow Electronics.
Chevron Corp. (CVX) has suffered along with almost all energy stocks in the past year, down 24 percent even after considering dividends. I think the next 12 months will be much better for this oil giant. And the dividend yield, more than 4 percent, is considerably better than you’d get at the bank. I own Chevron for a couple of clients.
Cooper Tire & Rubber Co. (CTB) was eyed by Apollo Tyres of India in 2013, but the acquisition fell through. On its own, I think Cooper is a good buy. People are keeping their cars longer and are more likely to need replacement tires, Cooper’s specialty. I own it for one client.
Glowworm
Corning Inc. (GLW, or glowworm in Wall Street slang) makes fiber optic cables and screens for TV sets and computers. Last year, its sales and earnings both increased by well over 20 percent.
Lincoln National Corp. (LNC), based in Radnor, Delaware County, is one of the largest U.S. insurers. It sells life insurance, annuities, group health insurance and other lines and has shown decent growth but only so-so profitability.
Methode Electronics Inc. (MEI), a Chicago maker of switches, connectors and other electronic gizmos, has been severely punished — excessively in my view — for a revenue shortfall and declining earnings estimates.
More Pep?
With the economy improving and gasoline prices moderate, I think people may drive more miles in the next 12 months than in the previous year. That could pep up earnings at Murphy USA Inc. (MUSA), the chain of gas stations spun off from Murphy Oil Corp. in 2013.
New Link Genetics Corp. (NLNK) stock has fallen about 20 percent from its spring highs, partly because an Ebola vaccine it was working on doesn’t appear to be effective. Other projects in the works include drugs intended to stimulate the immune system and a drug intended to treat pancreatic cancer.
Tutor Perini Corp. (TPC) is a construction company based in Sylmar, Calif. Last year, it had almost $4.5 billion in revenue, yet the market value of its stock is only $1 billion, making for an unusually low price/revenue ratio of 0.22.