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Dormant stocks can be a deal

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Tuesday, May 14, 2013, 12:01 a.m.
 

Is it an honor to belong to the Do Nothing Club?

That's a trick question. I started the “club” in a whimsical moment 14 years ago. It contains stocks that have gone absolutely nowhere in the past year, but that I expect to show some spark in the next year and beyond.

To qualify for the club, a stock must be within 1 percent of where it was a year ago. It also must have a market value of $1 billion or more.

While the Do Nothing Club is a somewhat frivolous idea, there is a point behind it. When stocks are soaring or plunging, lots of investors are likely to look at them. But when they are sleepy or dormant, no one may be looking. It might be possible to buy at a favorable price.

My three “Do Nothing” picks from a year ago have redeemed themselves well so far. Seaboard Corp., which raises pigs, mills grain and engages in ocean shipping, has returned 44 percent.

Nasdaq OMX Group, the parent to the Nasdaq Stock Market, notched a 32 percent return. (I own Nasdaq OMX shares personally and for clients.) LifePoint Hospitals Inc. also returned 32 percent.

Collectively, these three stocks averaged a 36.1 percent gain, as against 24.9 percent for the Standard & Poor's 500. Figures are total returns including dividends.

Last year's list was the ninth Do Nothing list I've compiled since I conceived the idea on a lazy spring afternoon in 1999. So far, the average one-year return has been 10.4 percent, compared with 4.5 percent for the S&P 500. The columns were written in May 1999 through 2006 and May 2012.

The average three-year return (available for eight of the lists) has been 28.3 percent, against only 5.6 percent for the S&P.

My do-nothing picks have beaten the S&P six years out of nine on a one-year basis. On a three-year basis, they have four wins and four losses.

Caveats: Past performance doesn't predict future results. The results of my column recommendations are theoretical, and don't take taxes or transaction costs into account. And the column results shouldn't be confused with those of actual portfolios I run for clients.

And here's a correction: The results I published for this series a year ago were slightly off, as I inadvertently omitted the 2005 column from my calculation. The numbers cited above correct that error.

Now, for some new selections. National Oilwell Varco Inc. (NOV), based in Houston, is a leading supplier of equipment to drillers. It is widely respected in its field and has a strong balance sheet.

I have to admit I knew very little about National Oilwell Varco until a couple of years ago, when a client came onboard who owned the stock. The more I learn about it, the better I like it.

But the marketplace has no interest at the moment. The shares were unchanged year-to-date through Friday, and were down 0.25 percent from a year ago. They sell for 12 times earnings, a mundane multiple considering that the company is consistently profitable year after year, and posted record earnings last year.

I also like Bank of Hawaii, which has a sizable market share in the 50th state. Its profitability ratios are nice and high (return on assets 1.2 percent, for example, and return on equity more than 15 percent ), and its nonperforming loans are nice and low.

I regard Bank of Hawaii's management as somewhat innovative. For example, the bank has put automated teller machines in a few dozen McDonalds restaurants in Hawaii and Guam.

Hawaii depends on tourism. Since the financial crisis began in 2007, and the recovery since 2009 has been anemic, tourism has suffered. But I think the economy on the mainland is getting better, which will have ripple effects helping Hawaii.

Third and finally, I recommend Avnet Inc. (AVT), a Phoenix company that distributes computer and electronic parts. Business spending on such equipment is somewhat subdued this year, partly because of uncertainties about the economy, the federal deficit and tax rules.

Analysts anticipate a bounce in 2014, and I agree with them. If they're right, Avnet will earn $3.29 a share this fiscal year (ending next month) and $4.18 next year. That makes the stock look attractive to me at the current price near $34.

During the past decade, Avnet shares have fetched a median value of 12.5 times earnings. Today they are under 10 times earnings, and not far above book value (corporate net worth per share). So I think now is a better than average time to buy the stock.

John Dorfman is chairman of Thunderstorm Capital LLC in Boston. He can be reached at jdorfman@thunderstormcapital.com.

 

 
 


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