Low P/E 'Robot' list posts profit
My trusty “robot” made a profit in 2012 but didn't cover itself with glory. It looked a little bit like R2D2 in Star Wars after a rough encounter with imperial storm troopers.
What is this robot? It is a naïve stock selection model that, much to my satisfaction, has enjoyed considerable success during the past 14 years.
The robot selects stocks with unusually low price/earnings ratios. I started this low P/E outliers list back in 1999 to make a point — that investors could do a lot worse than to buy extremely unpopular stocks, those with very low P/E ratios.
Stocks advance by exceeding prevailing expectations. Low expectations (embodied in a low P/E ratio) are easier to exceed than high expectations.
During the past 14 years, these robotically picked stocks have returned, on average, 22.5 percent per year. The Standard & Poor's 500 Index has returned, on average, 4.5 percent.
Last year, the robot stocks returned 7.8 percent but trailed the S&P's 14.1 percent. The figures are total returns, including reinvested dividends, from Dec. 31, 2011, through Dec. 28, 2012.
In 14 outings, the low P/E outliers have been profitable 11 times and have beaten the S&P 500 nine times.
It should be emphasized that the record of my column recommendations shouldn't be confused with the performance of actual portfolios I run for clients. Column results are hypothetical and don't reflect trading costs or taxes. Also, past performance may not indicate future results.
The selection method for the Robot Portfolio is simple. I start with the universe of U.S. stocks with a market value of $500 million or more, knock out those with debt greater than stockholders' equity (to reduce risk), and eliminate those with losses in the trailing 12 months.
That usually leaves about 1,000 stocks to pick from. By computer, without exercising judgment, I then select the 10 stocks with the lowest ratio of stock price to the company's earnings over the past four quarters.
These are stocks that most people won't go near. They have obvious problems — otherwise, they wouldn't sell for bargain-basement multiples like three, four or five times earnings. The average stock trades at 14 times earnings.
I don't like all the stocks this paradigm singles out, by any means. But I have found this field to be fertile ground for investigation and have often bought stocks that came to my attention through this paradigm.
Last year, the most successful pick the robot made was Holly Frontier Corp. (HFC), a refiner. It rose 108 percent.
The biggest clunker in last year's batch was GT Advanced Technologies Inc. (GTAT), which makes furnaces for producing purified silicon (for computer chips and solar panels) and furnaces for producing artificial sapphires. It ran into a buzz saw of Chinese competition and fell 59 percent.
Here is the new Robot Portfolio for 2013, based on prices and ratios as of Dec. 28, 2012.
The lowest P/E, three, belongs to Best Buy Co. (BBY), which retails consumer electronics. Critics say it has become a mere showroom for merchandise that people buy online from others. I think that Best Buy has a viable business, especially since competitor Circuit City bit the dust in the financial crisis.
Three qualifying companies have P/E ratios of four: Tronox Ltd. (TROX), which produces titanium dioxide pigments; Bridgepoint Education Inc. (BPI), which runs for-profit colleges; and Krispy Kreme Doughnuts Inc. (KKD). My favorite among these three is Krispy Kreme, which I like partly because it is run by a friend, Jim Morgan.
The remaining members of the robot list for 2013 all have P/E ratios of five. My favorite is Western Digital Corp. (WDC), a disk drive maker that I own personally and for clients. Another one that I own is Kulicke & Soffa Industries Inc. (KLIC), which makes semiconductor equipment such as die bonding systems and wafer saws.
Nacco Industries Inc. (NC) makes forklift trucks and small appliances (Hamilton Beach and Proctor-Silex brands). It owns a small coal company. I don't own it, but have recommended it from time to time in this column.
Completing the list are Assurant Inc. (AIZ), an issuer of health, disability, dental and credit insurance; Western Refining Inc. (WNR), which produces gasoline and other refined products sold mainly in Arizona, Texas and New Mexico; and C&J Energy Services Inc. (CJES), an oil service company that specializes in hydraulic fracturing, or fracking.
I will climb out on a limb and predict that this year's robot selections will beat the S&P 500.
John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist; email@example.com.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- In Steelers-Saints game, all eyes on Brown-Lewis matchup
- Steelers notebook: Defense has a retro feel
- Salvation Army in W.Pa. uses social media campaign
- Hunting creates strong bonds, traditions
- Sloppy Penguins fall to Hurricanes
- Trib real estate writer Spatter ‘worked right to the end’
- Williams tosses 6 TDs as Clairton sets state scoring record
- Thousands attend Vandergrift Light-Up Night, Christmas parade
- McKeesport’s Minerva’s Bakery to be featured on Sebak’s documentary
- No decision yet on charges against elderly driver who struck and killed pregnant woman
- Hempfield Area High School senior Richason creates Before I Die wall in Greensburg