Schwab and Lennar Exemplify Value Plus Growth
Posted: July 28, 2020
July 27, 2020 (Maple Hill Syndicate) – The philosopher’s stone was a myth; so was the fountain of youth. But here’s something that sounds unlikely, yet is feasible. You can get both value and growth in the stock market.
Value investors seek bargains. Growth investors seek companies with fast-growing earnings.
There’s an inherent tension there. Bargain-priced stocks are ones with visible problems. Growth stocks are ones enjoying success. But sometimes you can find a little of each, and that’s often a good strategy.
For this discussion, I define a value stock as one selling for 15 times per-share earnings or less. I define a growth stock as one with earnings growth averaging at least 12% over the past five years, and revenue growth averaging at least 10%.
I screened for stocks meeting both of those criteria. They also had to have debt less than stockholders’ equity, and a market value of $300 million or more.
Fifty-one U.S. stocks passed those tests, and I recommend five of them for your consideration.
Charles Schwab & Co. (SCHW) is the third-largest U.S. brokerage house, behind only Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS). Schwab leads in the discount-brokerage sector, and spearheaded the recent move for discounters to offer commission-free trades.
Nothing in life is totally free, of course. If brokerage houses don’t charge for trades, they must make money by charging interest on margin loans, or lending stock to short sellers, or scraping tiny fractions from the bid-ask spread. None of these are nefarious, but they are more hidden than commissions.
Among the discounters, Schwab probably has the best reputation, though much-smaller rival Robinhood Market Inc. (which is privately held) enjoys a loyal following among younger clients, with some 10 million online accounts.
In the past five years, Schwab has averaged 25% earnings growth. The stock sells for a little less than 15 times earnings.
Axos Financial Inc. (AX) is a bank based in Las Vegas that makes most of its mortgage loans in California, especially southern California. In the past five years, it has shown revenue growth of nearly 23% a year, with earnings growing at almost a 21% clip.
Like all banks, Axos faces the specter of loans turning sour, as families and businesses struggle with a loss of income. That’s part of why the stock sells for about seven times earnings now, when it normally commands a multiple of about 11.
Six Wall Street analysts follow Axos, and five of them currently recommend it.
Based in Ooltewah, Tennessee, Miller Industries Inc. (MLR) makes tow trucks and car carrier vehicles. It’s a small-cap stock with no coverage from Wall Street. Miller just barely made the revenue-growth cut for this column, but excelled in earnings growth, with a five-year growth rate of almost 23% a year.
It also has an unusually strong balance sheet. Debt is only 12% of equity. The stock is trading for nine times earnings, against a normal multiple of about 14.
A big question here is how badly the Coronavirus Recession will dent sales and profits. I don’t know, but in the 2007-2009 recession the company stay profitable – though barely.
Several homebuilders met my statistical criteria. One that looks interesting is Lennar Corp. (LNR), based in Miami. It is the second largest U.S. homebuilder by market value, after D.R. Horton Inc.
My thinking about homebuilders has been changing rapidly. When I first realized the pandemic would cause a recession, I thought that homebuilding stocks should be sold. They mostly did terribly during the past recession.
However, lately I’m thinking that a fair number of city dwellers may switch to the suburbs, largely avoiding crowded office buildings, buses and subways. That may mean owning a house instead of renting an apartment.
Before today, I’ve written 14 columns about stocks that have both value and growth characteristics. The average 12-month return on my recommendations has been 15.5%, compared with 10.5% for the Standard & Poor’s 500 Index.
Eleven of the 14 columns were profitable, while nine beat the index.
My picks from a year ago did gratifyingly well. All four selections beat the index, led by a 78% return in MarineMax Inc. (HZO). The average return was 39.1% versus 6.4% for the S&P 500.
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.
Disclosure: I own Miller Industries personally and in a hedge fund I manage. I own Goldman Sachs for some 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.