Sane Portfolio Advanced 47% Last Year
Posted: August 10, 2021
August 9, 2021 (Maple Hill Syndicate) – Most of my clients want medium-risk portfolios. A few tilt more to the conservative side.
To find stocks for the more conservative ones, a tool I use is the Sane Portfolio. This is a hypothetical collection of a dozen stocks that seem solid to me from several vantage points.
To be eligible for the Sane Portfolio, a stock must:
- Have a market value of $1 billion or more.
- Achieve a return on stockholders’ equity of 10% or better.
- Post earnings growth averaging at least 5% for five years.
- Have debt less than stockholders’ equity.
- Sell for less than 18 times per-share earnings.
- Sell for less than three times per-share revenue.
- Sell for less than three times book value (corporate net worth per share).
No single criterion is especially hard. But meeting all of them is a challenge. Only about 4% of all stocks can jump all those hurdles.
How It Works
From the qualifying stocks, I use judgment to pick a few, filling out my 12-stock roster. Once a stock is in the portfolio, it stays in unless it fails one of the criteria.
This year, only four stocks made it back. Eight dropped out, most of them because they became too expensive in the past year’s buoyant stock market.
The Sane Portfolio you’ll read about today is my 20th one. This paradigm has been profitable 15 years out of 19, and has beaten the Standard & Poor’s 500 Index 10 times. The average one-year return has been 11.1%, a bit better than the S&P, which has averaged 10.5%.
Last year, the Sane Portfolio had a very pleasant gain, returning 47% while the index was up 36%. A double in Textron Inc. (TXT) shares helped the cause.
Bear in mind that my column results are hypothetical: They don’t reflect actual trades, trading costs or taxes. These results shouldn’t be confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future results.
Tyson Foods Inc. (TSN) heads the list of returnees. It’s back for a fifth year.
Allstate Corp. (ALL), the big car and home insurer, joins the roster for a fourth year.
Cigna Corp. (CI), a health insurer, is back for year three.
D.R. Horton Inc. (DHI), the nation’s largest homebuilder, returns for its second appearance.
One new pick I’m excited about is Synchrony Financial (SYF), which issues and processes credit cards for Amazon.com, Loews and many other companies. I expect people to heat up their plastic this year, and I think credit-card defaults will probably decline.
Nucor Corp. (NUE), the nation’s largest steel maker, should benefit from the infrastructure bill now working its way through Congress. The effort to fix up roads, bridges and tunnels should increase demand for steel.
Paccar Inc. (PCAR), which makes Kenworth and Peterbilt trucks, was in the Sane Portfolio in 2019-2020. After declining 11% in the past year, the stock is cheap enough to qualify again. Over the past decade, Paccar has averaged 6% annual revenue growth and more than 10% earnings growth.
A debt-free choice is Encore Wire Corp. (WIRE), which makes wire and cable. Sounds prosaic? Perhaps. Yet Encore’s earnings growth has averaged 14% a year for the past ten years. The stock sells for less than seven times earnings.
People seem skeptical that MarineMax Inc. (HZO), the nation’s largest boat retailer, can keep up the fine results it’s been achieving. Perhaps recent results are unsustainably good, but the ten-year revenue growth rate is 13% annually.
If the lingering pandemic causes people to get their recreation outdoors rather than indoors, that would be good for Johnson Outdoors Inc. (JOUT). The company, based in Racine, Wisconsin, makes fishing and diving equipment. Johnson’s debt is only 11% of the company’s equity.
With technology stocks expensive, the portfolio is light in that sector. But we can include Amkor Technology Inc. (AMKR) of Tempe, Arizona, which provides packaging and test services to semiconductor makers. The stock sells for 14 times recent earnings and 11 times what analysts expect for next year.
For my final choice, I’ll go with Laboratory Corp of America Holdings (LH). I think we have entered a world where medical testing will be more common than it was before 2020. As one of the biggest labs, Lab Corp. stands to be a steady beneficiary of the trend to more testing.
Disclosure: I own D.R. Horton, Nucor and Synchrony Financial personally and for most of my clients. I own Allstate, MarineMax and Tyson Foods for some of my clients.
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.