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Dorfman: Only 2 'buys' in newest 30-30 Club

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Tuesday, April 8, 2014, 12:01 a.m.
 

With baseball getting under way again, it's time for me to think about my 30-30 Club.

In baseball, a player who hits 30 home runs and steals 30 bases makes the so-called 30-30 Club. In more than a century, only 38 players have achieved it, most recently Mike Trout and Ryan Braun in 2012. Other stars in the club are Willie Mays, Hank Aaron, Barry Bonds and his father, Bobby Bonds.

My 30-30 club, however, is for corporations. To make my 30-30 roster, a company must show a 30 percent return on stockholders' equity in the latest fiscal year and a 30 percent earnings growth rate during the past five years. Only companies with a market value of $2 billion or more are eligible.

Twenty-five companies made the grade this year, nine more than last year but five short of the record set in 2001. The largest companies that qualified are Las Vegas Sands Corp. (LVS), Deere and Co. (DE), Delta Air Lines Inc. (DAL), Motorola Solutions Inc. (MSI) and O'Reilly Automotive Inc. (ORLY).

Delta, Motorola Solutions and Las Vegas Sands were standouts for rapid earnings growth. They were joined by Constellation Brands Inc. (STZ), which produces alcoholic beverages, and Questcor Pharmaceuticals Inc. (QCOR), a specialty drug company.

Picking winners

The highest returns on stockholders' equity were achieved by Valhi Inc. (VHI), a maker of titanium dioxide pigments; Brinker International Inc. (EAT), a restaurant chain; Delta Air Lines; Booz Allen Hamilton Holding Corp. (BAH), a business consultant specializing in defense and intelligence; and Questcor.

All of the companies on the 30-30 roster are good companies. That doesn't make them good stocks. Many of the stocks are high-priced, reflecting investors' expectations about their success.

For that reason, I usually recommend at most a handful of the 30-30 honorees as stock selections. Last year, I recommended four: CF Industries Holdings Inc. (CF), Apple Inc. (AAPL), Caterpillar Inc. (CAT) and Alliance Resource Partners LP (ARPL).

The best performer was Alliance, a coal company that is structured as a limited partnership. It rose 37.5 percent. Close behind was CF at 36.5 percent. Apple and Caterpillar also did well, up 27.9 percent and 24.7 percent, respectively.

All four of those stocks beat the Standard & Poor's 500 Stock Index, which was up 21.8 percent.

Bear in mind that my column picks are hypothetical and don't reflect trading costs or taxes. The performance of column recommendations shouldn't be confused with that of portfolios I run for clients. And past performance doesn't predict success.

Past results

I've written 11 columns about the 30-30 Club, in 1999-2005, and 2010 to the present. I recommended at least one stock in 10 of those years.

On average, my recommendations drawn from the 30-30 roster have returned 12.9 percent the year after selection. By comparison, the Standard & Poor's 500 Index has returned 8.7 percent during the same periods.

My 30-30 picks have been profitable six times in 10 years and beaten the S&P 500 six times.

New picks

This year I can recommend only two of the 26 stocks on the roster. They are all excellent companies, but most of the stocks are too expensive for my taste, and a few have more debt than I deem desirable.

I like CVR Energy Inc. (CVI) of Sugar Land, Texas. It is the general partner for two companies structured as partnerships. One refines petroleum products; the other produces fertilizer.

CVR stock trades at only 10 times earnings and 0.4 times revenue, my kind of multiples. Debt is under control, amounting to about 37 percent of stockholders' equity. And I like the refining industry, although my clients and I own a rival refiner, HollyFrontier Corp. (HFC).

I find Delta Air Lines attractive now. In the past, I often dismissed Delta as too indebted. It has brought debt down into my acceptable range, albeit just barely. (Debt is just below stockholders' equity.)

Airlines should benefit this year from labor costs and fuel prices lower than in recent years. Longer term, the airline should benefit from the ongoing consolidation in the industry.

The roster

Here, listed alphabetically, are the companies in this year's 30-30 Club that are not already mentioned above:

Alliance Data Systems Corp. (ADS), Eastman Chemical Co. (EMN), Fossil Group Inc. (FOSL), Graco Inc. (GGG), GNC Holdings Inc. (GNC), Generac Holdings Inc. (GNRC), Goodyear Tire & Rubber Co. (GT), Manhattan Associates Inc. (MANH), Nu Skin Enterprises (NUS), Polaris Industries Inc. (PII), Pool Corp. (POOL), Tenneco Inc. (TEN), Team Health Holdings Inc. (TMH), and Western Refining Inc. (WNR).

Congratulations to all.

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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