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I can’t foretell the future. Can you?
If you believe that people can predict the future with some accuracy, then you should be a growth investor, and pick stocks whose earnings are going to soar.
If you believe that people’s guesses about the future are mostly naïve extrapolations, then you should stand with me as a value investor, and pick stocks that are out of favor.
One way I dramatize my belief on this subject is through the Bunny Portfolio. This portfolio is named after the Energizer Bunny, the mascot for a battery company. In commercials, that bunny was “still going” long after you’d expect it to stop.
How it Hops
It contains U.S. stocks that have posted average earnings growth of 25% or better in the past five years, yet sell for 12 times earnings or less. That can happen only if people think that the good growth is about to grind to a halt.
Since I believe people are terrible at predicting the future, I figure that a significant portion of these stocks will be “still going” longer than folks expect.
For this portfolio, I set the rules and a computer program picks the stocks. About three dozen stocks usually meet the basic criteria. From these, I narrow the field to ten stocks by selecting the five with the fastest earnings growth rates, and the five with the cheapest price relative to earnings.
Here are the ten 2017 Bunny stocks, listed alphabetically.
Applied Optoelectronics (AAOI), of Sugar Land, Texas, makes lasers and other advanced optical semiconductor devices, mostly for communications systems. The stock sells for nine times earnings.
Chimera Investment (CIM) is a New York finance company dealing in real estate loans and mortgage-backed securities. The stock fell 80% during the financial crisis and hasn’t gained much since, even though earnings progressed. The dividend yield is currently above 10%.
Gladstone Investment (with the lovely stock symbol GAIN) runs a closed-end fund that makes loans to mid-sized and small companies, often in connection with an acquisition or recapitalization. The stock sells for nine times earnings, and currently has a 7% dividend yield. It was in this portfolio last year and posted a 42% gain, unfortunately the only outstanding gain by any Bunny stock last year.
Goodyear Tire & Rubber Co. (GT) is in a mature industry. But a recovering economy and an aging U.S. auto fleet have propelled growth. The stock sells for 10 times earnings in a market that sports a multiple of 22.
Gray Television (GRN), based in Atlanta, owns about 35 television stations. Television companies have been leaking ad revenue to Internet companies, but still Gray managed a 25% return on equity in the past year.
Hersha Hospitality (HT), a real estate investment trust, owns and operates 51 upscale hotels in major U.S. cities. It too was on last year’s Bunny list, and posted a 12% loss. The dividend yield was recently 6.4%.
Liberty Ventures (LVNTA) is one of the many companies controlled by media magnate John Malone (net worth $7.9 billion according to Forbes). It owns interests in home shopping networks and various travel and entertainment web sites.
McKesson (MCK) distributes drugs, medical supplies and health and beauty supplies. Distributors’ pretax profit margins are often razor-thin, but McKesson’s are pretty decent, at 3.5% and its profitability is king-size, with a return on equity of 44% recently.
Meritor (MTOR) of Troy, Michigan, makes drivetrains, suspensions, braking systems and other components for military and heavy-duty vehicles. Operating income has grown at a 37% clip over the past five years. However, it carries a lot of debt.
Stoneridge (SRI) of Novi, Michigan, makes electrical and electronic components. Earnings have risen to $2.63 a share in the past four quarters, from 20 cents in 2012. Analysts look for smaller gains this year and next.
Bunny Portfolio’s Record
Long-term, the Bunny Portfolio has a good record, but it hasn’t done well lately.
In 16 previous years, the Bunny Portfolio has averaged a 15.9% one-year total return, well above the 6.5% figure for the Standard & Poor’s 500 over the same periods.
However, the Bunny paradigm has lost money in each of the past three years. It has been profitable 11 times out of 16, but beaten the S&P 500 only half the time.
Last year’s version lost 0.2% from Dec. 13, 2016 through Dec. 8, 2017. Meanwhile, the S&P 500 climbed 19.1%. A pair of airlines, Hawaiian Holdings (HA) and United Continental Holdings (UAL) were among the losers. There were a few gainers, but all of them (excepting Gladstone) were small.
Disclosure: I have no positions in the stocks mentioned in today’s column, personally or for clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.