Lear and Tyson Spearhead My Sane Portfolio
Posted: August 06, 2019
Investors who want a middle-of-the-road, slightly conservative group of stocks might take a look at my Sane Portfolio.
This is a collection of 12 stocks, some held over from prior years and others newly added. To qualify for membership in the Sane Portfolio, a stock must pass seven tests. None of them is especially hard, but fewer than 6% of U.S. stocks pass all of them. The tests are:
- Decent profitability (return on stockholders’ equity of 10% or more).
- A reasonable price (no more than 18 times earnings, 3 times book value, and 3 times revenue).
- Earnings growth averaging 5% or more the past five years.
- Market value of $1 billion or more.
- Debt less than stockholders’ equity.
From the group of qualifying stocks, I choose 12 for the Sane Portfolio. Once a stock is in, it stays in as long as it meets the eligibility criteria. Six stocks from last year are returning.
Lear (LEA), which manufactures seats and electronics for cars, makes its fourth appearance in the Sane Portfolio. Lear’s earnings grew 29% a year in the past five years, but fell 30% last year. The stock, now severely out of favor, sells for nine times earnings.
Tyson Foods (TSN) makes its third appearance. It is a leading producer of beef, chicken and pork. I like its growing business in prepared foods, recently about 21% of sales. Consumers love convenience.
Carnival (CCL), also back for a third time, is the world’s largest cruise line, with more than 100 ships. Among its brands are Carnival Cruise Lines, Holland America, Princess Cruises and Cunard Lines. It has shown a profit in each of the past 30 years.
Back for a second time are three stocks: Allstate (ALL), Phillips 66 (PSX) and Walgreens Boots Alliance. (WBA).
One thing I like about Allstate, a big car and home insurer, is that it has increased its dividend 12% a year in the past five years.
Shares in Phillips 66, a big refiner, have been weak since last summer. Yet the company has been highly profitable, with a 22% return on stockholders’ equity last year.
Walgreens Boots Alliance stock has declined from about $90 to $54 in the past four years. The stock once sold for 30 times earnings; today you can buy it for 11 times earnings.
There are six openings in the Sane Portfolio. Here are my six new selections.
Cigna (CI), the big insurer, sells for less than book value (corporate net worth per share) because people are unsure what the U.S. health-care system will look like. Despite proposals by Bernie Sanders and Elizabeth Warren, I think radical change in unlikely.
Truck maker Paccar (PCAR) has been consistently profitable and often handsomely so. The company is debt-free. Yet the stock sells for only 10 times earnings.
Even cheaper, at seven times earnings, is homebuilder Toll Brothers (TOL). It sells high-end homes, and investors currently prefer moderately prices ones. But I think Toll Brothers will do okay.
Selling well below book value is MetLife (MET), one of the largest U.S. life insurers. Puny interest rates have hurt the company in recent years, but they won’t last forever.
The conglomerate Textron (TXT) owns many businesses, including Bell helicopters and Cessna business jets. It has been profitable in 14 of the past 15 years.
Lastly, I pick ON Semiconductor (ON), which has grown revenue at an 18% clip for the past five years. ON was spun off from Motorola in 1999 and have been publicly traded since 2008. Profits bounce up and down–so far with more ups than downs.
I have compiled the Sane Portfolio most years since 1999. The average 12-month return on 17 columns has been 10.22% compared to 8.77% for the Standard & Poor’s 500 Index. In 17 tries, the Sane Portfolio has been profitable 14 times and has beaten the S&P nine times.
Last year was one of the three loss years. The portfolio fell 4.06% while the S&P 500 rose 5.03%. The worst performers were Thor Industries (THO), down 39%, and Lear, down 38%.
Bright spots were Tyson Foods and Sanderson Farms (SAFM), up 38% and 31% respectively.
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: I own Sanderson Farms and Walgreens for most clients and personally. I own Allstate, Carnival and Tyson Foods for one or more clients.