Robot Portfolio Tripped Up As Single Energy Stock Nose-Dives by John Dorfman, Dorfman Value Investments
A single disastrous energy stock was enough to scuttle my Robot Portfolio last year.
The portfolio suffered a 3.8 percent loss in 2015, dragged down by a 62 percent drop for Atwood Oceanics Inc. (ATW), an offshore driller that suffered as energy prices collapsed. The defeat reduced, but by no means eliminated, this portfolio’s long-term edge over the Standard & Poor’s 500 Index.
The Robot Portfolio is a 10-stock portfolio that I publish each year in my first column of the year. I don’t use judgment in picking the stocks; the selection is purely statistical. Start with all U.S. stocks with a market value of $500 million or more. Eliminate those with debt greater than equity. Then select the 10 stocks selling for the lowest multiple of the past four quarters’ earnings.
The point is simple. Investors could do a lot worse than to buy the most out-of-favor stocks in the market, as measured by that old standby, the price/earnings ratio.
Sparkling record
During the past 17 years, this naive stock-picking method has worked strikingly well. The Robot boasts a compound average annual return of 15.58 percent, compared to 4.17 percent for the S&P 500. Figures include reinvested dividends. The cumulative return for the Robot stocks has been 1,119 percent, versus 123 percent for the index.
That strong return has been achieved despite a sickening plunge of 60.8 percent in 2008. In 17 outings, the Robot has notched a profit 13 times and has beaten the S&P 500 10 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.
New picks
Here are the 10 stocks the Robot paradigm picks for 2016.
The cheapest stock in the group is Atwood Oceanics at two times earnings, the very stock that wrecked the Robot’s performance in 2015. The energy debacle is now 18 months old, and I think Atwood’s chances are better this year, although I suspect the true bottom in energy stocks is still several months away.
Second cheapest is PDL BioPharma Inc. (PDLI), also at two times earnings. This is a small biotech company based in Incline Village, Nev. The big worry here is expiring licensing agreements.
For three times earnings, you can buy shares in Chemtura Corp (CHMT), not that anyone wants to. The Philadelphia-based company makes a variety of chemicals, including lubricants, flame retardants and oil drilling fluids. It has lost money in 10 of the past 15 years and was in bankruptcy for 20 months in 2009-2010. Recent results look good, though.
MGIC Investors Corp. (MTG) has a price/earnings ratio of 3. It provides mortgage insurance — a line of business that scares investors since mortgage defaults were at the heart of the 2007-2009 financial crisis.
Weighing in at four times earnings is Antero Resources (AR), a Denver-based oil and gas company that drills mainly in West Virginia, Ohio and Pennsylvania. If I were to invest here, I’d take only half a position now and hope to snatch the rest at a lower price.
Voya Financial Inc. (VOYA), was spun off in 2013 from ING, a big Dutch financial company. It sells savings vehicles, investments and insurance products. At four times earnings, it is cheaper than I think it deserves, perhaps because it is so little known.
HP Inc. (HPQ), formerly Hewlett-Packard, recently split in two. The consulting and data-center businesses went to Hewlett Enterprise, while HP got the troubled personal-computer and printer businesses. Can this ship be righted? Maybe, and at five times earnings, it might be a good speculation.
Tempting to me at six times earnings is Greenbrier Companies Inc. (GBX) of Oswego, Ore., a maker of freight cars and tanker cars. It provides repairs and other services to railroads. Only a year and a half ago, this stock sold for $73, versus about $33 today.
Overseas Shipholding Group (OSG), based in New York, operates a fleet of oil tankers. It turned to profitability in 2015 after five loss years and emerged from bankruptcy after a three-year stay in Chapter 11. Famed hedge fund manager John Paulson owns shares. The P/E is 6.
Rounding out this year’s Robot roster is Fossil Group Inc. at six times earnings. Fossil sells watches and other accessories. Its watch business was severely hurt last year by the advent of the Apple Watch and other computer-watches. The problem is real, but I think the 67 percent decline in the stock last year was excessive.
Disclosure: I own shares of Greenbrier Companies for one client. I do not currently own the other stocks discussed in today’s column.
