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Tuesday, Dec. 11, 2012, 12:01 a.m.
 

The Bunny bounced back.

Beginning in 1999, I have compiled an annual portfolio of “growth at a low price” stocks, informally known as the Bunny Portfolio.

These are stocks with a historical five-year earnings growth rate averaging 25 percent or better, selling for 12 times earnings or less.

The Bunny nickname is a reference to the Energizer Bunny, which in battery commercials was “still going” after you would expect it to run out of energy.

The stocks in this portfolio represent companies that have done well, but that investors expect to poop out. But people have trouble predicting the future. Some of these companies will continue to post good sales and earnings gains, confounding the skeptics.

Last year's Bunny Portfolio rose 26.3 percent, compared with 18.3 percent for the Standard & Poor's 500 Index, from Dec. 13, 2011, through Dec. 7, 2012. Gains by Holly-Frontier Corp. (HFC, up 118 percent) and TRW Automotive Holdings Corp. (TRW, up 64 percent) were the driving forces.

Nine of the 10 stocks in the portfolio rose; the exception being ITT Educational Services Inc., which fell 64 percent.

The portfolio you will read about today is the 12th one in this series. The previous 11 lists have averaged a 17.9 percent gain, while the S&P 500 over the same 11 one-year periods has averaged 2.2 percent.

The lists were published in 1999-2006, and 2009 to the present. Nine of the 11 lists were profitable, and six beat the S&P 500, but the S&P 500 had bested the Bunny five times in a row until the comeback last year.

Bear in mind that past performance may not indicate future results. Results of my column recommendations are hypothetical and don't reflect trading costs or taxes. The results of column recommendations should never be confused with those of portfolios I run for clients.

In this Growth at a Low Price portfolio, I specify the selection criteria, and a computer screening program picks the individual stocks.

Usually about three dozen stocks meet the eligibility criteria. To narrow the field to 10 stocks, the selection protocol chooses the five with the highest average annual earnings growth in the past years, and the five with the lowest price/earnings ratios.

Here, in alphabetical order, are the 10 new selections from the Bunny paradigm:

• Acco Brands Corp. (ACCO)

• Avis Budget Group Inc. (CAR)

• Coinstar Inc. (CSTR)

• Jabil Circuit Inc. (JBL)

• Lin TV Corp. (TVL)

• Questcor Pharmaceuticals Inc. (QCOR)

• Republic Bancorp (RCBAA)

• Tal International Group Inc. (TAL)

• Tesoro Corp. (TSO)

• Western Digital Corp. (WDC)

My favorite is Western Digital, one of the world's two largest makers of computer disk drives. (Seagate is the other.) I have owned it for clients since 2008. I think disk drives will be around for a long time, and I find the stock compellingly cheap at four times earnings.

An intriguing speculation is Questcor Pharmaceuticals Inc. of Anaheim, Calif. The company makes a single drug, H.P. Acthar, used mostly to treat multiple sclerosis. Aetna refuses to pay for its use for that purpose, though it approves of the drug for a more limited use in treating infant spasms.

So far, that hasn't stopped physicians from prescribing Questcor's drug; sales have risen steadily. Another wildcard: the U.S. Attorney's Office in Pennsylvania is investigating the company's sales practices.

Republic Bancorp's growth in recent years was boosted by profitable but controversial tax-refund lending. Now it has jettisoned that business. Can other businesses take up the slack? We'll see. The bank, based in Louisville, is expanding into Tennessee and Minnesota.

I don't recommend Acco Brands (a maker of office supplies), Avis Budget Group (car rentals) or Lin TV (which operates some 43 television stations), as I regard their balance sheets as shaky.

I worry about cutthroat competition that could hurt Jabil Circuit (electronic manufacturing) and Tal International (intermodal container rental).

I never thought I would like Coinstar, which I sold short years ago, but now I do. Its Redbox movie rental vending machines have a 42 percent share in video rentals, according to JP Morgan (which doesn't recommend the stock). Its compound earnings growth rate the past five years is 31 percent.

The risk is that people increasingly will rent their movies through their TV sets or through their computers, instead of from a kiosk. I think there is room for multiple channels for a while.

As for refiner Tesoro, based in San Antonio, I like it mildly. But after a gain of almost 70 percent this year, I think most of the juice has been squeezed.

John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist; jdorfman@thunderstormcapital.com.

 

 
 


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