$1 billion list boasts solid record

John Dorfman
| Tuesday, Nov. 6, 2012, 12:01 a.m.

A player of any size can be an outstanding basketball player. But it sure doesn't hurt to be 6-foot-10.

Similarly, a stock of any size can achieve excellent capital gains. But I believe there is a sweet spot around $1 billion in market value. That's right on the line, as I define it, between small-capitalization stocks and mid-capitalization stocks.

By the time a company reaches $1 billion in market value, it usually has staying power and its management is usually seasoned. Yet it is still small enough to be “discovered” by major Wall Street players.

To dramatize this point, in 2001 I created a grouping of stocks I called the Billion Dollar Portfolio. It consists of 10 stocks, each of which has a market capitalization of about $1 billion. New stocks are chosen every year (with an occasional repeat).

I wrote about the Billion Dollar Portfolio each year from 2001 through 2006, and then revived it in 2011. So, there have been seven portfolios published so far. All seven have been profitable, and all seven have beaten the Standard & Poor's 500 Index.

On average, the Billion Dollar Portfolio has achieved an annual gain of 26.9 percent, while the S&P 500 has averaged 11.5 percent.

Last year's portfolio, first published on Oct. 25, 2011, gained 26.6 percent in 12 months, versus 17.6 percent for the S&P 500. The best gainer was Fair Isaac Corp., a maker of business software and tools, up 71 percent.

The worst loser was OmniVision Technologies, which makes imaging chips used in cameras, computers and phones. It fell 15 percent.

I know that streaks such as this one are partly luck. Bear in mind that past performance doesn't guarantee future results, and that these are paper portfolios, with no allowance for trading costs or taxes. The performance of my column recommendations shouldn't be confused with that of real-life portfolios I run.

For the next Billion Dollar Portfolio, I have 10 new picks. They are listed alphabetically.

Back from last year's list is Bob Evans Farms Inc. (BOBE). The Columbus, Ohio, company operates restaurants and sells pork sausage. It has been profitable in nine of the past 10 years, set a record for earnings last fiscal year, and is expected to break that record this year.

Ever wonder who made the absorbent material in your baby's disposable diapers? There's a fair chance it was Buckeye Technologies Inc. (BKI) of Memphis, Tenn. One thing I like about Buckeye is its strong balance sheet, with debt only 10 percent of stockholders' equity.

C&J Energy Services Inc. of Houston, Texas, provides hydraulic fracturing, or fracking, services to companies drilling for oil and gas. Though fracking is controversial, I think it will be in demand for at least the next several years. The stock seems cheap at five times earnings.

Community Bank System Inc. (CBU) is a regional bank based in Dewitt, N.Y., serving parts of New York and Pennsylvania. I like its 4 percent dividend yield and the fact that it has few non-performing loans.

EZCorp (EZPW), out of Austin, Texas, operates about 850 pawn shops in the United States, 200 in Britain, 180 in Mexico, and 70 in Canada. Revenue and earnings have grown steadily. In contrast to its customers, EZCorp has a whistle-clean balance sheet, with debt less than 3 percent of equity.

The best balance sheet among my 10 new recommendations probably belongs to Finish Line Inc. (FINL) of Indianapolis, Ind. It is debt-free. The company retails sports and leisure clothing for men, women and children. Earnings set a record last year and are expected to break it this year.

Key Energy Services Inc. (KEG) of Houston is an oilfield jack-of-all-trades, providing well completion, maintenance, workover and plugging, among other services. The stock sells for less than book value (corporate net worth per share).

Nacco Industries (NC) of Cleveland, Ohio, makes forklift trucks, manufactures household appliances and mines coal. Investors haven't forgiven Nacco for its hideous loss in 2009, but that's why it is dirt cheap at three times earnings, with a 4 percent dividend yield.

If you've been in school within the past 50 years, you probably read some books or periodicals from Scholastic Inc. (SCHL). Although it lost money in 2008-09, Scholastic has come back strong and posted record earnings last year.

Titan International Inc. (TWI) of Quincy, Ill., makes tires and wheels for tractors, mining machines and other off-road vehicles. After a string of losses and mediocre profits, it earned $1.18 a share last year and analysts expect $2.30 this year.

John Dorfman is chairman of Thunderstorm Capital in Boston; jdorfman@thunderstormcapital.com

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