My “Do Nothing” Stocks Have Averaged a 14% Return
Posted: May 28, 2024
May 27, 2024 — (Maple Hill Syndicate) – Investors often chase stocks that have soared or plunged. They may overlook stocks that have simply held still.
But there are sometimes real bargains in stocks that have done nothing for a while. Each May I write about such stocks. I call them the Do Nothing Club.
Over 20 years, my Do Nothing stocks have averaged a one-year return of 14.0%. That nicely beats the average for the Standard & Poor’s 500 Total Return Index over the same periods, which has been 9.9%.
I also calculate three-year returns on the Do Nothing stocks. Those have averaged 38.0%, versus 26.8% for the index.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
Why have these stocks done well? Perhaps stocks that show little price movement cease to be followed closely by investors and analysts. That leaves room for surprises, in some cases pleasant surprises.
These results are consistent with a study I commissioned from Mitchell & Co. long ago (when I was a Wall Street Journal reporter). It found that stocks on the new-highs list and stocks on the new-lows list both underperformed. Hurray for the neglected middle.
Here are five new Do Nothing stocks that look good to me. Each of them has a total return within six percentage points of zero in the 12 months through May 24, and also in the past month.
Cisco Systems
Cisco Systems Inc. (CSCO) is still the largest computer-networking company in the world, although a variety of companies including Arista Networks Inc. (ANET) and Hewlett Packard Enterprise Co. (HPE) are nipping at its heels.
In the ten years through March 2000, Cisco shares appreciated almost fifty-fold. Alas, those heady days are long gone. But the company has a net profit margin near 22%, and a return on stockholders’ equity near 27%. I think it’s a good buy at the recent price of about $46.
Schlumberger Ltd.
If you want to drill an oil well and you need sophisticated seismic data and mapping of hydrocarbon deposits, Schlumberger Ltd. (SLB) is one of the few companies that can help you. It was founded in France, and is incorporated in the Netherlands Antilles, but has its headquarters in Houston, Texas.
Schlumberger’s return on stockholders’ equity recently has been a highly respectable 22%. But the stock sells for only 15 times earnings, which is the territory I like as a value investor.
Sabine Royalty
If you can stand some complication of your tax return, I think Sabine Royalty Trust deserves consideration. It gets income from oil and gas properties in six states (Florida, Louisiana, Mississippi, New Mexico, Oklahoma and Texas), and passes the money to shareholders as dividends.
The dividend yield currently is more than 9%, and the five-year dividend growth rate is 20%. If you invest, you will receive a form K-1 each year and hand it over to your tax preparer.
Banner
Banner Corp. (BANR) is the holding company for Banner Bank, based in Walla Walla, Washington. A poisonous condition for banks is an inverted yield curve – that is, a situation in which short-term interest rates are higher than long-term ones. That condition has prevailed in the U.S. for nearly two years.
I’m starting to look at bank stocks now, because I hope that the yield curve will un-invert by the end of this year, if and when the Federal Reserve decides to lower short-term rates. I like this particular bank stock because it sells for less than 10 times earnings, and yields more than 4% in dividends.
PayPal
Over the past decade, PayPal Holdings Inc. (PYPL) has grown its sales by more than 17% a year, and earnings at better than a 14% clip. Its return on equity lately has been running at about 19%.
With that record of success, I’m a little surprised to find the stock trading at less than 16 times earnings. Over the past decade its price/earnings multiple has averaged more than 46.
Last Year
Last year was a satisfying one for my Do Nothing stocks. Collectively, my five picks advanced 44.3%, led by an 80% gain in Photronics Inc. (PLAB). Acuity Brands Inc. (AYI) and Dillard’s Inc. (DDS) also did well, rising 68% and 65% respectively.
My worst pick was Littelfuse Inc. (LFUS), which lost 2%. Alliance Bernstein LP (AB) was a laggard, rising 9%. For comparison, the Standard & Poor’s 500 Total Return Index notched a 30% advance.
Disclosure: I own Arista Networks personally and for most of my clients. I own Acuity Brands for one client.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, 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.