Walk up to any graduate student in finance. Ask her to design a stock-picking screen. I’ll bet you a milkshake that she will design something more complex than my Old Faithful stock-selection paradigm. Yet my picks in this column drawn from Old Faithful have averaged more than a 19% return per 12 months, more than double the average return for the Standard & Poor’s 500 Total Return Index.
To qualify as an Old Faithful stock, a stock must be based in the United States and meet six criteria:
· Profitable, with a return on equity 15% or better.
· Debt under control, less than equity.
· Stock price no more than 15 times earnings.
· Stock price no more than two times revenue.
· Stock price no more than 2 times book value (corporate net worth).
· Growing, with earnings growth averaging 10% or more over the past five years.
Here are a few stocks that intrigue me, drawn from the latest Old Faithful screen.
Westlake (WLK) is a chemical company based in Houston, Texas. Among its products are epoxies, which are important in making blades for wind power stations.
Even though Westlake has grown its earnings at a 14% annual pace the past five years, its stock price is barely above where it was five years ago.
A minor concern I have is that Westlake has some production facilities in China. Given the tense relationship between China and the United States, this might pose a problem at some point.
An ocean shipper based in Hawaii, Matson
Investors expect freight rates recede. Reasonable, but I doubt they will back close to 2019 levels. Matson has shown a profit in each of the past 15 years, and profits have been fat lately.
The collapse of Silicon Valley Bank and Signature Bank
Among the knocked-down bank stocks I like is Farmers & Merchants Bancorp. (FMCB), which based in Lodi, California and serves many towns in southern California. Revenue has grown at a 10% annual clip the past five years, and earnings considerably faster. The stock sells for 10 times earnings.
I think homebuilders as a group are undervalued now. Mortgage rates have risen and affordability is an issue, so investors are skittish. But there is pent-up demand for houses.
One homebuilder that I like is KB Home
Hibbett (HIBB), based in Birmingham, Alabama, runs a chain of some 1,100 sporting goods stores in 35 states. The stock price, which hit $90 about two years ago, has receded to about $58, which is only six times recent earnings and less than 0.5 times sales, a bargain in my book.
Over the past decade, Hibbett has increased its earnings have at an 11% annual clip. Because it concentrates on small and medium-sized cities, Hibbett is often the only sporting goods store in town, which helps keep the profit margin up.
I’ve written about Old Faithful almost every year since 1999, with a three-year blackout in 2007-2009. My Old Faithful selections have been profitable in 14 out of 20 years, and have beaten the S&P 500 total return in 15 of those years.
In 20 outings, the average return has been 19.96%, far above the 7.22% for the S&P 500 over the same periods.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
Last year’s result was nothing to write home about. I beat the S&P’s performance, which was negative 2.11%, but still had a 0.49% loss. Returns for my five picks were all over the place. D.R. Horton (DHI) had a 45% return and Timken
I hope for better returns on this year’s crop.
Disclosure: I own Matson personally and for most of my clients. I own Intel personally and for some clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
Read the full article here