Robot Portfolio: Value in the Extreme
Posted: January 04, 2022
January 3, 2022 (Maple Hill Syndicate) – Investors are keenly aware that growth stocks have beaten value stocks five years in a row. So what am I going to recommend today?
Some extreme value stocks.
Beginning in 1998, I’ve started the year with the Robot Portfolio, comprising the ten cheapest stocks in the market. My measure of cheapness is the price/earnings ratio (stock price divided by the company earnings per share for the past four quarters), or P/E for short.
These are high-risk stocks. The companies have obvious problems; otherwise their stocks wouldn’t be so cheap. But that leaves lots of room for positive surprises.
To be eligible for inclusion in the Robot Portfolio, a stock must have a market value of at least $500 million, positive earnings, and not too much debt (less than stockholders’ equity).
Over the past 23 years, the Robot has chugged to a cumulative return of 1,203%, dwarfing the 578% return on the Standard & Poor’s 500 Index. However, it’s been on a losing streak in recent years, when growth has been trouncing value.
Last year was the fourth straight year in which it failed to beat the index. The Robot returned a respectable 17.2%, but the S&P 500 roared to a 28.7% return.
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.
Perhaps it’s New Year’s optimism, but I sense that the market’s pendulum is beginning to swing toward value. I predict that the Robot Portfolio will outperform the index in 2022.
Robot’s New Picks
And now, let me introduce you to the new cheapies as 2022 begins.
Shenandoah Telecommunications Co. (SHEN), a broadband provider based in Edinburg, Virginia qualifies as the cheapest stock, with a price less than two times recent earnings. Analysts expect earnings to plunge this year, but three of the four who cover the stock like it anyway.
Agios Pharmaceuticals Inc. (AGIO) also fetches less than two times earnings. Based in Cambridge, Massachusetts, it’s a biotech company that was working on cancer and rare genetic disorders. It sold its anti-cancer operations about a year ago for $1.8 billion, so it’s redefining itself.
Genworth Financial Inc. (GNW) is a remnant of what once was General Electric’s financial empire. It sells mortgage insurance, life insurance and annuities. Profits in recent years have been sporadic and unimpressive, but they have improved lately. The P/E is two.
What would 19th-century tycoon Andrew Carnegie say if he knew that United States Steel Corp. (X), which he founded, was now a mere mid-sized stock? It had losses in nine of the past 15 years. But lately, with tariff protection and keen demand for steel, it has been racking up profits. The P/E is two.
Another familiar name is Smith & Wesson Brands Inc. (SWBI), a rifle and gun manufacturer based in Springfield, Massachusetts. This company had a great year last year and the stock sells for three times earnings. Investors may fear strict gun-control laws. I favor those, but think them unlikely.
Sage Therapeutics Inc. (SAGE), a biotech company based in Cambridge, Massachusetts, also trades at three times earnings. It targets brain disorders including depression. The stock fell 50% in the past year as a depression drug it was working on with Biogen floundered in clinical trials.
Enova International Inc. (ENVA) is an online consumer lending company based in Chicago. Earnings have grown at a 57% clip the past five years, yet the stock sells for only three times earnings. This is also one of the ten stocks in my annual Bunny Portfolio.
Bio-Rad Laboratories Inc. (BIO), a medical-testing company, is based in Hercules, California. The stock sells for a mere three times earnings because investors fear that earnings will fall severely once Covid testing tails off. I feel that we now live in a world that will require more testing, Covid or no.
Weighing in at less than four times earnings is Ironwood Pharmaceuticals Inc. (IRWD) of Boston. Its main product (Linzess) treats irritable bowel syndrome with constipation. Over the past ten years, the stock has sold for 15 times earnings, on average, so the present price may be a bargain.
Completing my list of ten Robot stocks is eBay Inc. (EBAY), an online marketplace for new and used goods, at under four times earnings. Investors figure there will be less reason to shop through eBay once consumers return to brick-and-mortar stores.
Based on past experience, some of these stocks will decline in the coming year. But there’s a good chance that a few will pop dramatically enough to make the speculation worthwhile.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.