Stocks in My Do Nothing Club May Just Wake Up
Posted: May 19, 2020
May 11, 2020 (Maple Hill Syndicate) – Coronavirus has sent stocks careening around like the balls in a pinball machine.
Hardly any stocks have managed to hold fairly steady, a difficult feat in this environment. I think some of them deserve a look.
Like most pundits, I often write about stocks that have risen or fallen dramatically. Once a year I like to write about stocks that haven’t moved much. I call them the Do Nothing Club.
Over the years, I’ve written 16 columns on these Do Nothing stocks. The average one-year return has been 7.68% and the average three-year return has been 30.9%. That beats the Standard & Poor’s 500 Index by 0.08 of a percentage point for one year and 10.3 percentage points for three years.
Each of my picks from a year ago moved substantially. On the plus side, Lam Research Corp. (LRCX) returned 44%, Bristol-Myers Squibb Co. (BMY) 37%, and Allstate Corp. (ALL) 9%. But Prudential Financial Inc. (PRU) lost 38% and Southwest Airlines Co. (LUV) dropped 49%. Net result: a gain of only 0.55%, trailing the S&P 500, which returned 5.92%.
Bear in mind that my column recommendations 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 returns.
Now, let’s look at some new Do Nothing picks. To be eligible for the club this year, a stock had to be within 10% of where it was a month ago, and also a year ago.
Boston Scientific Corp. (BSX) has accomplished a major turnaround. After posting losses in nine of the 10 years through 2015, it has made four straight profits, with an impressive 38% return on stockholders’ equity last year.
Though it’s best known for its stents (which hold open clogged arteries), Boston Scientific also hundreds of other medical devices, from defibrillators to deep brain stimulation systems.
CEO Michael Mahoney was head of medical devices at Johnson & Johnson before joining Boston Scientific in 2011. In my opinion, he has done a great job of turning the company around, enriching the product line while cutting manufacturing costs.
Cummins Inc. (CMI), formerly known as Cummins Engine, makes diesel engines for trucks, locomotives, and generators. It’s been kind to its long-term holders. But would anyone in their right mind buy an industrial cyclical stock when we’re early in a recession?
I would say yes — but not right this minute. I think that most investors expect a short, sharp, six-month recession. I fear it will be a longer, nastier slog lasting nine months or more.
From about $180 a year ago, Cummins stock fell to about $103 in mid-March, but has rebounded to $161. I suggest nibbling if it falls below $150 and buying in quantity if it revisits the March low.
Progressive Corp. (PGR) has been gaining market share in the auto-insurance market, perhaps because of its quirky, funny ads featuring a character named Flo. It is number three with about 5.6% of the U.S. market, versus 6.6% for Berkshire Hathaway (Geico) and 9.3% for State Farm.
Last year, Progressive earned 26% on stockholders’ equity, which is quite strong. The stock sells for 12 times recent earnings and 14 times analysts’ guess about this year’s earnings. Of course, given the pandemic, no one has a good handle on what this year will look like.
Back from last year’s list is Allstate Corp., another insurer. It ranks only fifth in U.S. market share for auto insurance, but second in homeowners insurance.
I like Allstate because its revenue growth has been consistently strong, and has accelerated recently. It has shown a profit in 14 of the past 15 years (the exception, not surprisingly, being recession-wracked 2008).
I don’t know how well property-and-casualty insurers will survive the recession that is gathering force now, but it seems to me that people must insure their homes, even if they aren’t venturing out of them.
In early 2017, Kraft Heinz shares traded above $90. Today they are below $30.
For years, I disdained this stock. I felt that people overpaid for the presumptive stability of consumer-staples stocks, and that Kraft Heinz would suffer from the trend for consumers to prefer fresher food.
But now, the stock price has been chopped violently, and I think shoppers in the coming year will be putting emphasis on convenience and affordability.
Kraft Heinz shares currently yield 5.4% in dividends. And even in a recession, I figure people will buy Oscar Mayer meats, Velveeta cheese, Heinz ketchup and Maxwell House coffee.
Disclosure: I own Progressive personally and for most of my clients. I own Allstate 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.