Have a Gander at my Perfect 10 Portfolio
Posted: July 09, 2019
Perhaps the phrase “perfect 10” makes you think of a beautiful woman, or a perfect score in gymnastics. Well, my Perfect 10 Portfolio is a little different. It consists of ten stocks, each of which carries a price/earnings ratio (P/E) of 10.
The P/E is simply a stock’s price divided by the company’s earnings per share. Less popular stocks have low P/Es, more popular stocks have high ones. Generally, the faster a company’s growth rate, the higher the P/E.
I advocate low-P/E investing. I believe that stocks advance by exceeding expectations, and low expectations are easier to exceed than high ones.
Over the past few decades, the average P/E for stocks has been about 15. At present, it’s 22. By either standard, a P/E of 10 is low.
I’ve compiled a Perfect 10 Portfolio most years since 2000. On the 16 portfolios preceding today’s, the average 12-month return has been 20.2% That leaves the average return on the Standard & Poor’s 500 Index in the dust–it was 9.4% for the same 16 periods. Eleven of my 16 lists have beaten the S&P 500, and 13 of them have been profitable.
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’s Perfect 10 Portfolio scored an 11% return versus 7.5% for the index. The best performer was Graham Holdings Co. (GHC), up 20%. The worst was Waddell & Reed Financial (WDR), down 11%.
Here are the ten stocks I’m choosing for the Perfect 10 Portfolio in the coming year.
A mid-sized electronics company based in Fountain Inn, South Carolina, AVX (AVX) is majority-owned by the big Japanese electronics company, Kyocera (KYOCY). It sells electronic components made by Kyocera, as well as its own. The company is debt-free, a quality I like.
Biogen (BIIB) is one of the larger U.S. biotech companies. Its stock, which hit $400 in 2014, is at about $234 now. Investors were disillusioned when its proposed Alzheimer’s drug didn’t succeed in clinical trials. So far, no one else’s has either.
BorgWarner (BWA), from Auburn Hills, Michigan, makes auto parts, especially engine and drive train parts, for conventional, hybrid and electric vehicles. The outlook for car sales isn’t brilliant, but the company is quite profitable–both usually, and now.
Based in Houston, Texas, ConocoPhillips (COP) is a large oil-and-gas exploration and production company. Its scope is worldwide and its return on equity was above 22% last year. These are not boom times for energy, but I believe the bust is over.
A land development company in Florida, Consolidated-Tomoka(CTO) has irregular earnings, as most land development companies do. It operates apartments, retail buildings and golf courses. It has turned a profit in 13 of the past 15 years.
Hibbett Sports (HIBB) operates 1,168 sporting goods stores in 35 states. It has more than 100 stores each in Alabama, Georgia and Texas. Revenue growth has been consistently good but earnings have sputtered lately.
A retailer of pleasure boats and fishing boats, Marine Max (HZO) is based in Clearwater, Florida, and has 63 stores in 16 states. Revenue and earnings growth have been impressive. I think the stock is cheap because investors fear that a recession is on the horizon.
A behemoth life-and-health insurer, MetLife (MET) is based in New York City. The era of low interest rates has been hard on it, since insurers typically invest their “float” (money that has been paid in premiums and isn’t yet needed for claims) in bonds. The company has steadily increased its dividend.
A very strong balance sheet is one of the things I like at Miller Industries (MLR). The company, which hails from Ooltewah, Tennessee, makes tow trucks and car-transport vehicles. Almost no one on Wall Street follows it, leaving some room for it to be “discovered.”
Reliance Steel & Aluminum (RS) was on this list year and roughly matched the market since then. I don’t like tariffs, but I do think the Trump Administration’s tariffs on imported steel and aluminum will benefit Reliance, whose stock sells for only 0.5 times revenue.
Disclosure: I own Miller Industries personally and for some clients. A fund I manage holds call options on Biogen and Hibbett Stores. Performance figures in today’s column are for periods ended June 28, 2019.