30-30 Club for stocks, not baseball
Baseball's 30-30 Club is reserved for players who smash 30 homes runs and steal 30 bases in the same season. Last year only two players – Mike Trout and Ryan Braun – did it. Since major league baseball began more than 100 years ago, only 39 players have.
I have my own version of the 30-30 Club, and it is for companies, not ballplayers. To make it, a company must achieve a 30 percent return on stockholders' equity and have a 30 percent earnings growth rate over the past five years. In other words, profits must be large and growing fast.
It's a difficult feat – though not as difficult as in baseball. This year, 16 companies made my 30-30 roster, including such well-known corporations as Apple Inc., Mastercard Inc. and Caterpillar Inc.
I first compiled a 30-30 list in 1999. I did it annually for seven years, dropped it, and then revived it in 2010. The way the list has changed over the years shows the ebb and flow of market leadership.
Back in 1999, the 30-30 Club was full of information-technology companies. No more. Apple this year is the only one. Medical companies used to do well too, but Becton-Dickinson & Co. (BDX) is the sole medical entry this year.
The roster this year is as diverse, by industry, as I've ever seen it. For example, here are the top five by market value.
• Apple (AAPL) makes computers, smart phones and iPods.
• MasterCard (MA) is in consumer and retail finance.
• Caterpillar (CAT) makes heavy construction equipment
• Priceline.com Inc. (PCLN) provides an online hotel reservation service.
• Becton Dickinson (BDX)makes medical devices and instruments.
The next five are Sherwin-Williams Co. (SHW), a paint maker; CF Industrial Holdings Inc. (CF), a fertilizer producer; Nordstrom Inc. (JWN), a high-end retailer; C.H. Robinson Worldwide Inc. (CHRW), a transportation and logistics company; and Nordson Corp. (NDSN), which makes adhesives, sealants and coatings.
Rounding out the list are Newmarket Corp. (NEU), which makes fuel and lubricant additives; Credit Acceptance (CACC), which provides financial services to car dealers; Tempur-Pedic International Inc. (TPX), a mattress maker; Nu Skin Enterprises Inc. (NUS), which sells cosmetics and nutritional products; Toro Co. (TTC), which makes lawn mowers and other turf equipment; and Alliance Resource Partners LP (ARLP), which mines coal.
If a company makes this list, it is a good company. But it may not be a good stock, because the stock price may already reflect investors' high expectations.
So, I honor all of the companies on the roster, but recommend few. The number of companies has varied from a low of 11 (in 2004) to a high of 30 (in 2001). I have recommended anywhere from zero (2004) to seven (2005).
The 10 columns I've written on this subject list show an average 12-month gain on my recommendations of 10.85 percent, compared with 7.29 percent for the Standard & Poor's 500 Index.
Only nine years counted, as I had no recommendations in 2004. My picks were profitable five times out of nine, and beat the S&P five times.
This year there are four stocks in the 30-30 Club that I recommend.
CF Industries, the fertilizer producer, is the cheapest, selling for less than seven times recent earnings. Analysts expect its earnings to fall slightly this year and next. But they are falling from a very high level. Profits should still be good, and the stock sells for only 8 times the 2014 estimate.
Apple is a stock I warned against at higher prices, including a year ago in the 30-30 Club discussion. But the stock that seemed “a little pricey” to me then has fallen 29 percent, and now sells at less than 10 times earnings. At the current quote of about $423 a share, I think it's a buy.
Caterpillar gets less than a quarter of its sales in the United States; it's truly a worldwide enterprise. Its earnings are sensitive to the value of the U.S. dollar: A weak dollar helps them and a strong dollar hurts them. I don't know how the dollar will fare, but I like Caterpillar's valuation of just under 10 times earnings and less than one times revenue.
Finally, I recommend Alliance Resource Partners, in the prosaic and out-of-favor coal business. Coal has been hurt by ultra-cheap natural gas, but I think gas will become a little less cheap. Alliance offers a fat dividend yield of 6.9 percent, and while there is some risk the dividend will be cut, I don't think that will happen.
John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at firstname.lastname@example.org.