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Crime does pay, but just a little

About John Dorfman
Picture John Dorfman 617-542-8888
Freelance Columnist
Pittsburgh Tribune-Review

John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. His firm or clients may own or trade securities discussed in this column.

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By John Dorfman

Published: Tuesday, Oct. 22, 2013, 12:01 a.m.

Crime didn't pay this past year.

Once a year, I devote a column to stock ideas stolen from other money managers. The fruits of crime have generally been sweet.

The “Purloined Portfolio” has been profitable all nine times I've compiled it, and has beaten the Standard & Poor's 500 Index seven times. On average, my stolen ideas have generated an 18.3 percent annual return, compared to 8.5 percent for the S&P.

But last year was a terrible year for my light-fingered selections. The Purloined Portfolio managed only a 4.7 percent total return from Oct. 16, 2012, through Oct. 16, 2013, paltry compared to 21 percent for the index.

Bear in mind that the performance of my column recommendations is theoretical, and doesn't take into account taxes or trading costs. Past performance doesn't predict future results. And the results of my column picks shouldn't be confused with the performance of actual portfolios I manage for clients.

The methodology for the Purloined Portfolio is simple. First I pick a few money managers I respect. Then I select one stock owned by each manager, based on their filings to the Securities and Exchange Commission.

The managers are never consulted, and in some cases could already have sold all or part of their holding in the stock I select.

My lineup of managers this year contains seven individuals: Bruce Berkowitz, Scott Black, David Dreman, Randall Eley, Ken Heebner, David A. Katz, and Charles (Chuck) Royce.

The stock I select is not necessarily one of the manager's largest holdings, nor their favorite holding. They are simply stocks the manager holds that look promising to me.

Berkowitz

Bruce Berkowitz manages the Fairholme Fund (FAIRX) in Miami, a fund that has racked up an 11.55 percent annual return over the past 10 years.

From his holdings I recommend Leucadia National Corp. (LUK), the New York conglomerate that owns the brokerage house Jefferies & Co. Leucadia is also in dozens of other businesses ranging from beef packing to gaming. Its stock sells for 9 times earnings and just above book value (corporate net worth per share).

Black

Scott Black runs Delphi Management and is a member of the Barron's Roundtable. Among his holdings, I favor Everest Re Group Ltd. of Hamilton, Bermuda. As its name implies, it is a reinsurance company.

That's a punishing business in years when hurricanes or earthquakes abound, but with Everest at 8 times earnings and near book value, I think the risk-reward ratio is good.

Dreman

David Dreman, my mentor in the securities business, founded Dreman Value Management in Jersey City and manages the DWS Dreman Small Cap Value Fund (KDSSX).

I like Alliant Techsystems Inc. (ATK), Virginia, one of his larger positions. The Arlington, Va., company makes rocket motors, rocket fuel and ammunition. The stock sells for 12 times earnings — a nice price for a company that has increased its profits at a 12.5 percent clip the past 10 years.

Eley

Randall Eley manages institutional accounts and the Edgar Lomax Value Fund (LOMAX). From his roster last year I took Intel Corp. (INTC), which turned in a kissing-your-sister 10 percent performance. This year I will go with Intel again.

The world's largest chip maker has achieved earnings growth averaging 10 percent over the past 10 years, accelerating to 14 percent over the past five years. I think it's undervalued at 13 times earnings.

Heebner

Ken Heebner, a Boston manager sometimes called “Bigfoot” because of his emphatic trading style, has chalked up an average annual return of 9.4 percent the past 10 years in CGM Focus Fund (CGMFX). My pick from Heebner's roster is Rock-Tenn Co. (RKT) of Norcross, Ga., which makes corrugated boxes and other packaging.

I believe that the economic recovery will gain more steam in 2014, and that packaging companies' shares will rise with that tide.

Katz

David A. Katz of Matrix Asset Advisors in New York runs the Matrix Advisors Value Fund (NAVFX), which was up almost 27 percent the first nine months of this year. I like JPMorgan Chase & Co., his second-largest holding, according to filings. At 9 times earnings and near book value, it seems to me a genuine bargain, and I own it for a few clients.

Royce

The last manager I wish to steal from this month is Charles (Chuck) Royce, president of Royce & Associates and senior manager of the Royce Pennsylvania Mutual Fund (PENNX).

From him I will lift Helmerich & Payne Inc. (HP), a driller out of Tulsa, Okla. Despite a sparking 10-year growth rate of 15 percent in earnings, Helmerich & Payne goes for a modest multiple, 11 times earnings.

Let's wish this year's Purloined Portfolio better luck than last year's.

John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at jdorfman@thunderstormcapital.com.

 

 
 


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