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.
The Perfect 10 Portfolio Rides Again
Posted: July 07, 2020
July 6, 2020 (Maple Hill Syndicate) – In 2015, one year before he became President, Donald Trump remarked that supermodel Heidi Klum was “sadly, no longer a 10.” Klum good-naturedly responded by wearing a tee shirt marked 9.99.
What is always a 10? My Perfect 10 Portfolio. It contains ten stocks, each of which is priced at 10 times the past four quarters’ earnings per share.
To bargain hunters, that’s an attractive ratio. U.S. stocks usually sell for about 15 times earnings. Today, with interest rates low and investors’ hopes high, they command 22 times earnings.
Over many decades, but not lately, stocks with low price/earnings ratio tend to be the best buys.
My Perfect 10 Portfolio has done well over the years. The average one-year return for 17 columns has been 19.1%, well above the 9.1% on the Standard & Poor’s 500 Index.
The Perfect 10 Portfolio has beaten the S&P 11 times out of 17 — but not last year. It has been profitable 14 times.
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.
These days, there aren’t a great many stocks selling for as little as 10 times earnings. Those that do have problems – but in those cases where the problems can be solved, a nice capital gain may await. Here are this year’s ten stocks.
Based in Kearney, Nebraska, Buckle Inc. (BKE) retails clothing, shoes and accessories. “It goes without saying that this was the most challenging quarter we ever faced,” said CEO Dennis Nelson of the latest quarter. But the company has done well long-term, making the stock an interesting speculation.
Farmer & Merchants
Farmers & Merchants Bancorp. (FMCB) is a small bank based in Lodi, California. One rule of thumb for banks is that a return on assets over 1.0% is good. This bank has exceeded that mark in 14 of the past 15 years, and just missed it the other time. Insiders here tend to be buyers of their own stock.
The rise of index funds has been bad for most mutual-fund companies. But I think good days will come again for stock pickers, and Franklin Resources Inc. (BEN) has a lot of talent in house. The company has about $6 billion in cash, against $1.3 billion of debt.
Meritage Homes Corp. (MTH) was going great guns before the coronavirus epidemic. It’s hard to say how things will go next, but the first quarter, which was partially virus-afflicted, wasn’t bad. Meritage had big losses in the 2007-2009 financial crisis. But it’s shown a profit in nine of the ten years since.
A leading carpet and tile maker, Mohawk Industries Inc. (MHK) has traditionally commanded a multiple of about 21, as compared with 10 now. We are in a recession of unknown length and severity; presumably people will buy less carpet. But the stock has been punished a lot — down 34% in the past year.
I’ve long been a fan of Oshkosh Corp., which makes lifts, fire engines, garbage trucks, and military transport vehicles. I’m not sure how timely the stock is now, because I expect both federal and municipal budgets to be pinched by the recession. But I think the company is a good long-term investment.
Years ago, I inaugurated a feature in The Wall Street Journal in which we ranked the performance of brokerage houses’ recommended lists. Raymond James usually did well, which caused me to respect the firm – a respect that endures today. The stock usually trades for about 17 times earnings; today it is 10.
I don’t expect airlines to thrive until a cure for Covid-19 is found. But Southwest Airlines Co. (LUV) has always struck me as the highest-quality stock in an often-shaky industry. Before the epidemic struck, it had registered five very good years in a row. Unlike many airlines, its debt seems under control.
Stoneridge Inc., out of Novi, Michigan, makes electronic components for cars. The auto industry is stalled. But the trend has been for cars to incorporate more and more electronics, and this should work in Stoneridge’s favor. Return on equity has been high (over 20%) five years in a row…pre-pandemic.
Up to now, United Therapeutics has made excellent profits with drugs to address pulmonary hypertension. But one of its key drugs is now off patent, and two other patents expire in 2026 and 2027. Buying this stock is an expression of faith in the company’s research pipeline.
Disclosure: I own Oshkosh shares personally and in a hedge fund I manage.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at firstname.lastname@example.org.