There’s Something Special About the $1 Billion Line
Posted: October 26, 2021
October 25, 2021 (Maple Hill Syndicate) – This year through October 22, large stocks are outperforming small ones by about five percentage points, roughly 22% to 17%.
In the long run, though – from 1926 to the present – small stocks have beaten big ones, according to research by Kenneth French and colleagues at University of Chicago.
I have a favorite size for stocks, which is around $1 billion in market value. By my reckoning, that is the line between mid-sized stocks and small stocks.
Once a year, I recommend a batch of ten stocks with a market value close to that line. I call it my Billion Dollar Portfolio.
In 16 outings, my Billion Dollar Portfolio has averaged a one-year total return (including dividends) of 15.6%. That beats the average return of 13.5% % for the Standard & Poor’s 500, which is a large-cap index.
Twelve of my 16 hypothetical portfolios have shown a profit, and 11 have beaten the S&P 500.
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.
Last year my Billion Dollar picks scored a 43.6% return, which was better than the 35.6% figure for the S&P. My best gainers were Encore Wire TK (WIRE), up 137%, and Ultra Clean Holdings Inc. (UCTT), up 88%. My worst results were a 33% loss in Qiwi Plc. (QIWI) and a 5% loss in Netgear.
And now, here are a new batch of stocks I like near the $1 billion line. They’re listed alphabetically.
From Reno, Nevada, comes Employers Holdings Inc. (EIG), which specialty is workers’ compensation insurance. It is about to record its 20th straight year of profits. Its debt is only about 2% of stockholders’ equity (essentially, the company’s net worth), and it has more than $5 in cash for each dollar of debt.
German American Bancorp (GABC) is a banking company with headquarters in Jasper, Indiana. I like to see banks earn 1.00% on assets or better. This bank has done that 13 years in a row (soon to be 14), and has exceeded 1.3% in the past six years.
Ichor Holdings Ltd., from Fremont, California, makes delivery systems for gases and chemicals used in the manufacture of semiconductors. A relatively young company, Ichor has shown a profit five years in a row, and should show a record profit this year.
John B. Sanfilippo & Son Inc. (JBSS), of Elgin, Illinois, processes nuts. It markets its nuts under the name Fisher and several other names, and also does a large private-label business. This is not a growth industry, but it is profitable, and the company has widened its net margin lately to near 7%.
A pandemic-weary nation may benefit from getting outdoors for some fun. That would help Johnson Outdoors Inc. (JOUT) of Racine, Wisconsin, which makes fishing, camping and diving gear. Sales have been terrific lately, and the dividend growth rate is excellent.
MarineMax Inc. (HZO) is the largest U.S. retailer of recreational boats and yachts. The widening income gap, with the rich getting richer and other groups standing still, may be bad for the country. But it’s great if you’re a boat retailer, and MarineMax has been doing very well the past couple of years.
National Healthcare Corp. (NHC), with headquarters in Murfreesboro, Tennessee, operates nursing homes. It’s a tough industry, and one that lately struggles to hire enough staff. But the stock looks extremely cheap at less than seven times earnings.
Back for a second year is Netgear Inc. (NTGR), which makes wireless networking equipment for homes and small businesses. Based in San Jose, California, the company has been consistently profitable, but the profit level has varied sharply, from mediocre to outstanding. The stock trades for 10 times earnings.
As its name implies, PC Connection Inc. (CNXN) retails computers, software and related products. I love its balance sheet, with debt only 1% of equity. The company has shown a profit in 14 of the past 15 years. The profit level is only sometimes exciting, however.
Selling for 10 times estimated earnings, Standard Motor Products Inc. (SMP) looks a bit underpriced to me. Based in Long Island City, New York, the company makes replacement parts for cars and trucks. It offers a 2.1% dividend yield and has increased dividends at almost a 13% annual clip the past decade.
Disclosure: I own MarineMax personally and for most of my clients. I own John B. Sanfilippo for one or more clients.
John Dorfman is chairman of Dorfman Value Investments in Boston. His firm of clients may own or trade securities discussed in this column. He can be reached at email@example.com.