Sane Portfolio XIV Features Chickens, Tires, Diesel Engines, Airlines
Posted: August 04, 2015
In 1999 I started the Sane Portfolio, intended as a medium-risk, slightly conservative cluster of a dozen stocks.
To be eligible for the Sane Portfolio, a stock must pass seven tests. It must:
- Have a market value of $1 billion or more.
- Sell for 18 times earnings or less.
- Show earnings growth averaging at least 5 percent a year the past five years.
- Boast profitability (return on stockholders’ equity) of 10 percent or better in the latest fiscal year.
- Sell for three times revenue or less.
- Sell for three times book value (corporate net worth) or less.
- Have debt less than stockholders’ equity.
From the eligible stocks (usually a few dozen, 101 this year), I select the members of the Sane Portfolio. Once in, a stock stays in until it fails to meet one of the criteria.
PAST RESULTS
Following the tradition of the Super Bowl, I have given Roman numerals to these portfolios. Last year’s was Sane Portfolio XIII. Perhaps that was an unlucky number. I was caught with two energy stocks and one natural resource stock in a year when oil and commodity prices plunged.
As a result, my Sane Portfolio achieved a total return of only 3 percent from Aug. 5, 2014, through July 31. That trailed way behind the 11.8 percent return on the Standard & Poor’s 500.
The long-term picture is brighter. In 13 outings, the Sane Portfolio has averaged a 10.8 percent return. The return on the S&P 500, including dividends, for the same 13 one-year periods, is 8.2 percent. The Sane Portfolio has beaten the S&P seven times out of 13, and shown a profit 11 times.
Bear in mind that the results of my column picks are hypothetical and don’t reflect actual trades, trading costs or taxes. Past performance does not predict future results. And the performance of my column picks should not be confused with that of portfolios I manage professionally.
IN AND OUT
This year, eight of the dozen Sane Portfolio stocks retained their spots. Western Digital Corp. (WDC), which I own for clients and personally, is back for a fifth consecutive year.
Cisco Systems Inc. (CSCO), the computer networking giant, is back for a fourth time. Returning for a third go are National Oilwell Varco Inc. (NOV), Norfolk Southern Corp. (NSC) and World Fuel Services Corp. (INT).
Back for seconds are Chubb Corp. (CB), an insurer; D.R. Horton Inc. (DHI), a homebuilder; and Magna International Inc. (MGA), an auto parts maker.
Four stocks got the boot. Agco Corp. (AGCO) just missed the profitability cut. BHP Billiton Ltd. (BHP), which mines iron ore, gold and coal, suffered in the global commodity slide. Exxon Mobil Corp. (XOM) languished as oil fell from near $100 a barrel to near $50. Northrop Grumman, after a 43 percent rise, poked through a couple of the valuation limits. (I still own Northrop Grumman for clients and personally.)
So it’s time to induct four new members into the Sane Portfolio.
SANDERSON FARMS
I’ll start with Sanderson Farms Inc. (SAFM), a chicken producer based in Laurel, Miss. Chicken stocks have had their feathers plucked this year as the bird flu has reduced farmers’ flocks. But I believe the long-term trend for Americans to eat more chicken and less beef is still in place. At 0.6 times revenue and less than six times earnings, Sanderson strikes me as a major bargain. I own it for clients and personally.
COOPER TIRE
Another stock I own for clients (and personally) is Cooper Tire & Rubber Co. The company, based in Findlay, Ohio, sells replacement tires through tire stores and gas stations. From 2013 to the present, the average age of cars on U.S. roads has remained above 11 years. In that environment, the need for replacement tires should be robust.
CUMMINS
I am restoring to the Sane Portfolio Cummins Inc. (CMI) of Columbus, Ind., a maker of diesel engines. Cummins was previously in this portfolio in 2006-07. It stands out for its profitability: Last year it earned about 22 percent on stockholders’ equity.
JET BLUE
I’ll wrap it up with an airline, JetBlue Airways Corp. (JBLU). Mergers have greatly reduced the number of major airlines, and airlines have cut flights on less-traveled routes. Consequently planes are flying fuller, which is good for profitability. In addition, the price of jet fuel has been cut by about half in the past 13 months, and jet fuel is roughly a third of costs for many airlines. So it’s a great time to be an airline, and JetBlue is one of the better operators.