Robot Portfolio Has Doubled Market Index Over 21 Years
Posted: January 07, 2020
Over the past 21 years, my Robot Portfolio, a naïve stock-picking paradigm, has more than doubled the return on the Standard & Poor’s 500 Index, the gauge most professionals use to track the performance of the U.S. stock market.
The cumulative returns: 1,034% for the Robot, 379% for the S&P 500. That works out to a compound annual return of 12.26% for the Robot and 6.55% for the index.
The Robot Portfolio is a 20-year experiment in extreme value investing. Start with all U.S. stocks that are profitable, have debt less than corporate net worth, and have $500 million or more in market value. From that universe, simply select the ten cheapest.
“Cheap” here means a low price/earnings ratio, which is a stock’s price divided by the company’s per-share profits.
Results are extraordinarily volatile, partly because several of the Robot stocks often are in a single industry. The Robot returned 97% in 2009, 73% in 2013 and 68% in 2000. Yet it lost 61% in 2008, 31% in 2007 and 20% in 2018.
Performance figures cited here are theoretical and don’t reflect actual trades, trading costs or taxes. These results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
While the 20-year returns are extremely good, the Robot has been in a slump, trailing the index in five of the past six years. That’s not surprising, since investors lately have preferred growth stocks to value stocks.
Also, index funds that mimic the S&P 500 have become popular. That pulls money into the large growth stocks, such as Microsoft (MSFT) and Facebook (FB), which have a big weight in the index.
Last year, the Robot acted like it needs some oil. It lost 11.28%, while the S&P 500 returned 30.43% including reinvested dividends.
Four of the ten stocks the Robot picked a year ago were energy stocks, and all four were down, with a 90% loss in Mammoth Energy Services (TUSK) and a 62% loss in Gulfport Energy (GPOR).
Outside the energy realm, the Robot posted a few good gains, such as 68% in Western Digital (WDC) and 60% in Micron Technology (MU).
Since the end of August 2019, value stocks have perked up considerably. This may be a good time to take a look at my 2020 Robot Portfolio. Here are the ten new selections.
Energy stocks dominate the new lineup, which is scary since they have been in a bear market for five and a half years now. However, they won’t go down forever, and perhaps 2020 will prove to be a turning point.
Why would energy equities perk up? Well, there are a few reasons. The volume of oil and gas in storage has decreased lately. The rig count (number of active wells) has fallen. And in a Mideast fraught with tension, a supply disruption is possible.
Finally, if economies perk up around the world (not likely but possible) the demand for oil and gas might exceed expectations.
The energy stocks in this year’s Robot Portfolio are:
- Southwestern Energy Co. (SWN), with a price/earnings ratio of 1.2.
- Warrior Met Coal(HCC) with a P/E of 1.7.
- Berry Petroleum (BRY), with a multiple of 3.
- Murphy Oil(MUR), at 3.4.
- Alliance Resource Partners LP(ARLP), 3.6.
- Arch Coal (ARCH), 4.0.
Outside the energy realm, the cheapest stock is Brighthouse Financial (BHS), with a P/E ratio of 2.6. Brighthouse, which split off from MetLife in 2017, took with it most of MetLife’s individual life insurance and annuity business. It posted losses in 2016 and 2017, but swung to a profit in 2018.
It’s hard to believe now, but United States Steel (X) was once the largest corporation in the U.S. Today it’s a mere mid-sized stock. This will be its third straight profitable year, but it posted losses in seven of the eight previous years. The P/E is just 3.
Ligand Pharmaceuticals (LGND) is cheap (3.7 P/E) in large part because investors don’t trust its accounting. It had to restate financial results in 2016. Some investors also question its business model, which relies on drugs purchased from other companies, rather than developed internally. Nonetheless, five out of six analysts who cover it recommend it.
Advertisers use Live Ramp Holdings (RAMP) software to gather and organize information about customers and prospects. The San Francisco company’s revenue has been falling for years, but profits took a big upturn in fiscal 2019. Eleven Wall Street analysts follow it; nine recommend it.
Disclosure: A private partnership I manage holds call options on Murphy Oil.
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 firstname.lastname@example.org.