It’s Hammock Time: Join the Do-Nothing Club
Posted: May 24, 2018
TRIBUNE-REVIEW | Monday, May 14, 2018, 11:00 p.m.
There’s an old stock-market saying, “A stock doesn’t know where it’s been.”
I believe profoundly in that saying. What matters to me is how good a value a stock seems to be at the present moment, regardless of whether it’s been soaring, plunging or staying put.
Let’s consider a few stocks that haven’t gone anywhere much. I call them members of the Do-Nothing Club.
To be eligible for this “club,” a stock has to show lazy performance. It must be within 5 percent of where it was a month ago, and also within 5 percent of where it was a year ago.
Momentum investors will scorn these stocks, and so will contrarian bargain hunters. Yet some of these stocks could be good buys.
I’ve selected a few Do-Nothing stocks to recommend 14 times in the past, always at this time of year, when spring fever reigns and it’s time to get the hammock strung again in the yard.
DID SOMETHING
Guess what? The Do-Nothing Club hasn’t done so badly. The average three-year cumulative return (on 12 Do-Nothing Club lists) has been 30.9 percent. That beats the Standard & Poor’s 500 Index at 17.6 percent.
The average 12-month return (on 14 lists) has been 9.1 percent, versus 7.6 percent for the S&P 500.
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 Do-Nothing recommendations as a group were stagnant, rising 1.8 percent while the index advanced 15.8 percent, including dividends. Omega Protein Corp. (OME) rose 15.8 percent as it was acquired by Cooke Aquaculture. But China Mobile Ltd. (CHL) fells 9.4 percent and Williams-Sonoma Inc. did … well, nothing, declining 1.04 percent.
Now let’s yawn twice and take a look at a few new Do-Nothing stocks that just might do something in the coming year.
TIME WARNER
Time Warner Inc. may not be the company you remember. It has spun off its cable networks and dissolved its connection with AOL.com. What about the famous magazines, such as Time and Sports Illustrated? They were spun off in 2014, then bought by Meredith Corp., which now wants to sell them.
Today Time Warner owns some highly successful TV channels (Home Box Office, TNT and CNN, to name a few) and the Warner Brothers movie studio, which is one of the largest in the world.
In the past four quarters, earnings without nonrecurring items grew about 30 percent. That percentage isn’t sustainable, but I believe growth will continue.
AT&T Inc. wants to acquire Time Warner and offered $107.50 a share for it in October 2016. Time Warner stock currently trades at about $94 a share.
The U.S. Justice Department opposed the merger and a court battle is now in progress. The White House says that it did not tell the Justice Department what position to take. Last week, lawyer Rudolph Giuliani said that the president “denied the merger” but he subsequently took it back.
I say that if the merger is killed, Time Warner stock is still a good buy. I would be happy to see Time Warner simply go on as it is. If necessary, I believe it could sell off its parts for a lot more than $107.50.
EATON
Eaton Corp., based in Dublin, Ireland, makes power-control equipment used by utilities and manufacturers, and electrical components for trucks and cars.
Twenty-four Wall Street analysts follow Eaton. There is hardly any variation among their revenue estimates (which cluster around $5.4 billion) or earnings predictions ($5.12 to $5.30 a share).
Eaton has beaten the prevailing consensus estimate in the past two quarters, albeit mildly. With the stock at 11 times earnings, in a market that’s above 20 times earnings, I think it may give investors a pleasant surprise.
BANK OF THE OZARKS
From Bill Clinton’s native state, Arkansas, comes Bank of the Ozarks (OZRK). In six of the past eight years, this bank has earned a return on assets of more than 2 percent, which is unusually high. Growing rapidly, it has increased its book value (corporate net worth) about 25 percent a year in the past decade.
I believe that this bank has been prudent with its reserves. It has increased salaries and plans to spend money updating its name (to Bank OZK) but I don’t feel it’s gone overboard on expenses. I think this stock is attractive at the present price of about $48, which is 14 times earnings.
Disclosure: I currently own none of the stocks discussed in today’s column, for myself or clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Mass., 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.