2014 Bunny Portfolio Hops Into A Wall, But The Tradition Keeps Going by John Dorfman, Dorfman Value Investments
My Bunny Portfolio, which has an admirable record since I launched it in 1999, fell on its face in the past year.
This hypothetical portfolio is named after the Energizer Bunny of battery commercial fame, which was “still going” long after you would have expected it to stop. The portfolio contains 10 stocks that have shown superb earnings growth in the past but are cheap because investors think their outlook is grim.
The theory behind the portfolio is that people are poor predictors of the future, and therefore these companies’ success may continue.
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Obviously, this is a risky approach, because it involves betting that the majority is wrong. Then again, the majority often is.
In 2014-15, the pessimistic consensus was right. My Dec. 9, 2014, Bunny Portfolio contained half-dozen energy stocks and — just as the majority expected — they did terribly.
Overall, my list fell 6.68 percent and would have done worse except that one of the stocks, Kodiak Oil & Gas, attracted a takeover offer. For comparison, the Standard & Poor’s 500 Index rose 3.68 percent, including dividends.
The bad year reduced the average annual return on my Bunny stocks to 18.7 percent, still way ahead of the S&P 500 at 5.3 percent for 14 one-year periods. The Bunny has beaten the index eight times out of 14, and has been profitable 11 times.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.
How it works
What is the anatomy of this stock-picking rabbit? Simply this:
- Start with all American stocks with a market value of more than $250 million.
- Select those with earnings growth that has exceeded 25 percent per year in the past five years.
- Narrow the field to stocks selling for 12 times earnings or less.
- Form a 10-stock portfolio using the five stocks with the highest growth rate and the five with the lowest price/earnings ratio.
I don’t apply judgment in choosing the stocks. I set the parameters, and the computer algorithm picks the securities.
I have written about the Bunny Portfolio every December since 1999, excluding 2007 and 2008 when I was temporarily retired as a stock market columnist.
Let’s see what the bunny paradigm suggests for the next year.
Calpine Corp. (CPN), based in Houston, operates 88 wholesale power plants throughout the country. It sells for just 10 times earnings, even though earnings have grown rapidly in recent years. A sore point is its heavy debt load — more than three times equity.
Chemtura Corp. (CHMT) is a specialty chemical maker headquartered in Philadelphia. It has had rapid earnings growth in recent years but without any real revenue growth. At three times earnings, it’s tempting.
Cincinnati Bell Inc. (CBB), as an old-fashioned phone company in an old-fashioned city, doesn’t generate much enthusiasm from investors. Analysts expect earnings to fall next year, and most rate the stock a “hold.”
Federated National Holdings Co. (FNHC) had a string of losses from 2008 through 2011, but it has been gaining ground rapidly since then. The company, based in Sunrise, Fla., sells homeowners and flood insurance, as well as other property-and-liability coverage.
I like Goodyear Tire & Rubber Co. (GT), as I expect strong sales of new cars and replacement tires in the next year. Analysts are sharply divided on the Akron, Ohio, tire maker’s prospects.
Greenbrier Cos. (GBX) in Lake Oswego, Ore., makes railcars, especially freight cars and tank cars. This is a severely cyclical industry, but I like its five-year prospects. At five times recent years and seven times next year’s consensus, the stock looks attractive.
Hornbeck Offshore Services Inc. (HOS) of Covington, La., serves a severely depressed oil and gas industry. The stock peaked at about $57 in mid-2013 and has fallen to near $10. Perhaps it’s early, but some smart money has started moving into this stock.
Lannett Co. (LCI), a generic drug maker, is another Philadelphia company. Revenue growth has been good, earnings growth great. But many traders doubt the good times can last. The stock sells for nine times earnings, way below its 10-year average multiple of 27.
PHI Inc. (PHIIK) of Lafayette, La., is another company struggling amid the energy downturn. Its initials stand for Petroleum Helicopters International, and a big part of its business involves ferrying men and materials to and from offshore oil platforms.
The list closes with Pilgrims Pride Corp. (PPV), one of America’s largest chicken producers. All chicken companies have been hurt by bird flu this year, but there is still a long-term trend for Americans to eat more chicken.
Disclosure: I do not own the stocks discussed in this column personally or for clients.