Perfect 10 Portfolio About Profits, Not Beauty by John Dorfman, Dorfman Value Investments
About a year ago, Donald Trump remarked that supermodel Heidi Klum was “no longer a 10.” Ms. Klum responded good-humoredly by wearing a T-shirt that said 9.99.
Clearly, the phrase “”Perfect 10″ remains a popular expression for a beautiful woman, almost four decades after the movie “10” propelled Bo Derek to stardom.
There's been a mad dash to find the next Tesla in recent years, with billions of dollars being poured into electric vehicle companies. Components have received less attention than complete vehicles, but one ValueWalk subscriber found a component maker he believes would be a good investment. During a recent webinar, subscriber David Schneider shared his Read More
I have a Perfect 10 Portfolio myself, but it’s not about beauty, it’s about profits. This portfolio contains 10 stocks, each of which sells for 10 times the company’s per-share earnings.
Since the average stock historically sells for 15 times earnings (and at the moment, more like 23) my Perfect 10 stocks are presumptively bargains.
In this column, I repeatedly make the point that buying stocks with low price/earnings ratios is usually a good idea. The Perfect 10 Portfolio is intended to illustrate that point.
Perfect 10 Portfolio – Averaging 19 percent
So far, the demonstration is going OK. In 13 one-year periods, the Perfect 10 Portfolio has averaged 19.1 percent. By contrast, the Standard & Poor’s 500 Index has averaged 8.6 percent.
Ten of the 13 columns have been profitable, and eight have beaten the S&P 500.
Last year’s Perfect 10 list wasn’t quite beach-worthy. It lost 3.8 percent while the S&P 500 was in positive territory, up 3.1 percent including dividends. A plunge by New Link Genetics Corp. (NLNK) was the main culprit.
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.
For people who believe, as I do, that out-of-favor stocks sporting low price/earnings ratios often make the best investments, here are 10 new selections, each selling for about 10 times earnings.
Cookies and gasoline
Mondelez International Inc. (MDLZ) of Deerfield, Ill., formerly Kraft Foods, is in the news for its pass at Hershey Co. It owns well-known brands such as Cadbury’s, Oreo, Nabisco and Tang. The trend toward healthier eating works against it, but it never loses money and had great profits in 2015.
Marathon Petroleum Corp. (MPC) is one of the largest U.S. refiners. The Findlay, Ohio, company also owns 8,400 miles of pipelines and about 2,600 convenience stores (mostly under the Speedway name). I think refiners’ shares are oversold and will bounce back.
KBR Inc. (KBR), an engineering firm based in Houston, traded for more than $40 a share in 2007. Today, it’s below $14. Engineering firms are out of favor, especially those known for energy projects. Yet KBR earned a 22 percent return on stockholders’ equity in the past four quarters and has little debt.
SLM Corp. (SLM), better known as Sallie Mae, originates loans to students, often with their parents as co-signers. These loans typically carry the high-interest rate you might expect for high-risk loans. But there’s a special wrinkle — if the student doesn’t pay the loan back, Uncle Sam is on the hook.
Cubicles and car wiring
Steelcase Inc. (SCS), with headquarters in Grand Rapids, Mich., is best known for office furniture. It has turned a profit in 10 of the past 12 years. Over the past decade, the stock has sold for an average of 23 times earnings, so the present multiple of 10 seems to me to be a bargain.
Lear Corp. (LEA), out of Southfield, Mich., makes seating and electrical systems for cars worldwide. It serves almost every major car manufacturer in the world, and has grown its book value (corporate net worth per share) by an average of 12 percent over the past five years.
Everest Re Group Ltd. (RE), based in Hamilton, Bermuda, is one of the larger reinsurance companies in the world. Think of a reinsurance company as an insurer’s insurer. As you might imagine, profits bounce around a lot, depending in part on the frequency of hurricanes and earthquakes.
Avnet Inc. (AVT), a Phoenix-based distributor of electronics, is on the Perfect 10 list for a third time. The first time, in 2006-2007, it scored a 138 percent gain. Last year, it had a 1.9 percent loss. I expect a result in between this time.
Two Chinese companies make the Perfect 10 list this year. Hollysys Automation Technologies Ltd. (HOLI), based in Beijing, makes factory automation equipment. Following a few loss years, it has posted profits in the respectable-to-good range for six years running.
Sinopec Shanghai Petrochemical Co. (SHI) is a chemical manufacturer. Although China as a whole is in a growth slowdown, Sinopec Shanghai has posted some of its best profits ever in the past year.
Disclosure: I own Lear shares personally and for almost all of my clients.
Perfect 10 Portfolio