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Insights and Thoughts from Dorfman Value Investments

John Dorfman writes a syndicated column that appears weekly in Forbes.com, GuruFocus.com, Ohio.com, the Omaha World Herald, the Pittsburgh Tribune Review and the Virginian Pilot. In it, he tries to provide original, profitable stock ideas for readers. In contrast to almost all other investment columnists, he systematically reports on past results, both good and bad.

Recent columns are archived here.

Four Stocks Ben Graham Might Like

John Dorfman

If Ben Graham were alive today, he might have a headache.

The father of value investment would confront an environment in which value has been largely out of favor for ten years.

I think Graham would affirm that value will have its day in the sun again. I imagine he would say that stocks like Amazon.com (AMZN, 74 times earnings) and Netflix (NFLX, 121 times earnings) are overhyped. And I speculate that he would find a few bargains.

Graham lived from 1884 to 1976, ran a hedge fund and taught at Columbia University, where was a mentor to famed investor Warren Buffet. He wrote The Intelligent Investor and cowrote (with David Dodd) Security Analysis.

Once a year in this column, I pick a few stocks that I believe Graham would have favored. The average 12-month return on my 16 previous such columns has been 18.2%, which compares quite favorably with 11.1% for the S&P 500.

Of those 16 columns, 12 have beaten the Standard & Poor’s 500, and 11 have shown a profit.

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.

I choose my “Graham stocks” from a group of stocks that pass a simplified version of the master’s criteria. To be considered, a stock must:

  • Be priced at 15 times earnings or less.
  • Sell for no more than book value (corporate net worth per share).
  • Have debt less than 50% of book value.

Here are four new picks that I believe would appeal to Graham were he alive today.

At about $84 a share, Prudential Financial (PRU) shares are about where they were in 2006. It has been a severe market laggard.

Most stocks are pricey today but this one is cheap. Prudential shares go for less than nine times earnings, and less than seven times the earnings analyst project for 2020. I think a rebound is likely.

The stock may stay in the doldrums as long as interest rates stay abnormally low. Insurance companies generally hold a lot of bonds, and in recent years the income stream on bonds has been puny. But that, too, shall pass.

Critics say that Bank OZK (OZK) is expanding too rapidly. They question whether the bank’s loss controls, traditionally outstanding, can endure the strain.

Bank OZK now has about 250 branches in ten states, including California and New York. Originally it was a regional bank based in Little Rock, Arkansas, and was called Bank of the Ozarks.

I’m guessing that CEO George Gleason and his colleagues can pull it off. Traditionally a construction lender, OZK has moved into marine lending, aviation lending, and other niches.

Ten analysts cover the stock, and nine rate it a mere “hold.” I am more optimistic, but I would characterize the stock as speculative.

Greenbrier Companies (GBX) is one of the largest U.S. manufacturers of railcars. Last month, it bought its competitor American Railcar Industries for $410 million. American Railcar was the third-largest U.S. manufacturer of railcars; Greenbrier was second. The combined company will be right on the heels of industry leader Trinity Industries (TRN).

Railcar makers are vulnerable to economic cycles. But Greenbrier has turned a profit in 13 of the past 15 years. And if energy costs rise in years to come, Greenbrier may benefit, because trains are a more energy-efficient way to move cargo than trucks.

Callon Petroleum Co. (CPE), based in Houston, Texas, drills for oil and gas in west Texas and southeast New Mexico. As oil companies go, it’s a minnow, with sales last year of $551 million.

The entire energy industry is out of favor with investors–the sort of sentiment swing that Graham liked to take advantage of. Since Callon’s debt-to-equity ratio is modest, I think it can ride out the current tough times.

Last Year

While the long-term record of this series is stellar, my picks from one year ago were disastrous, down a hideous 31.5%. The worst loser was Resolute Forest Products (RFP), down 52.9%.

Possible explanations for the bad 12-month performance are: (a) It was a terrible year for value, (b) I’m an idiot, or (c) both.

I hope, however, to regain my intelligence quotient–and the reader’s respect–with this year’s selections.

Disclosure: I own Bank OZK personally and for most of my clients. I own Greenbrier personally and for some clients.

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John Dorfman is chairman of Dorfman Value Investments LLC. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.

 

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