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Dorfman: Old Faithful stock picks for 2014

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Tuesday, April 29, 2014, 12:01 a.m.
 

I don't call it “Old Faithful” for nothing.

Stocks that I've recommended in this column, drawn from the Old Faithful stock screen from 1999 to the present, have beaten the Standard & Poor's 500 Index nine times in 11 one-year periods.

Here are the results from the past year, based on total returns from April 30, 2013, through April 25, 2014.

• American Railcar Industries Inc. (ARII), up 89.9 percent.

• Northrop Grumman Corp. (NOC), up 57.2 percent

• Holly Frontier Corp. (HFC), up 12.3 percent.

• Employers Holdings Inc. (EIG), down 10.4 percent.

• Select Comfort Corp. (SCSS), down 13.0 percent

In the aggregate, my five Old Faithful picks from last year advanced 27.2 percent, besting the 16.6 percent return on the S&P 500.

For all 11 Old Faithful columns I've written, measuring on a one-year basis, my picks have averaged a 29.6 percent total return, versus 3.7 percent for the index.

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

How it works

Old Faithful is a fairly conventional, but demanding, stock-picking screen. For a stock to qualify, it must have a market value of $250 million or more, and show strength in four different areas:

• Profitability. The return on stockholders' equity must be 15 percent or more.

• Growth. Earnings growth the past five years must be 15 percent or better.

• Balance sheet. Debt must be less than 50 percent of stockholders' equity.

• Valuation. The stock must sell for no more than 15 times the past four quarters' earnings, and no more than 2 times revenue.

Over the years, I've generally observed that from 20 to 50 stocks pass this screen at any given time. At present, 33 pass (using software from TD Ameritrade Institutional, which lists more than 3,800 stocks in that size range, many of them foreign issues that trade in the United States.)

Of those 33, I've selected five to recommend for Old Faithful's 12th outing.

Mueller Industries

Mueller Industries Inc. (MLI) of Memphis, Tenn., is a leading supplier of plumbing, heating, ventilation and cooling products. Items like refrigerator coils and copper tubing may not drip with glamour, but Mueller has been solidly profitable for years, has increased its dividend recently and has shown some insider buying.

If you believe, as I do, that housing is going to pick up in the United States for the next three to five years, Mueller is a good backdoor play.

Northrop Grumman

Northrop Grumman still passes the Old Faithful screen, despite its big run-up in the past 12 months. The Falls Church, Va., company makes combat aircraft, defense electronics, drones and other defense products.

The world keeps furnishing reminders — many of them lately from Russia and Iran — that there are limits to how far the United States can prudently cut defense spending. At 13 times earnings, I think this stock is a good bet.

Western Refining

Western Refining Inc. (WNR) of El Paso, Texas, is one of the less popular stocks in an out-of-favor group: refiners. I favor the group, partly because I think the price of refiners' raw material — oil — will stay under control for a year or two and partly because I expect a rebound in gasoline consumption.

Western operates three refineries, an asphalt manufacturing plant and more than 200 gas stations. Its return on stockholders' equity exceeded 30 percent last year.

Sturm Ruger

Sturm Ruger & Co. (RGR) of Southport, Conn., makes rifles, shotguns and handguns. It has been posting record sales and earnings of late, and is opening a third plant to deal with the high demand.

Mass shootings, including some at schools, have increased pressure for stricter gun control. But there is no strong consensus for it in the country nor in Congress.

The Gap

Fashion is a fickle business. The Gap Inc. (GPS), like all clothing chains, goes in and out of fashion. But it seems to me that it spends a higher percentage of its time in sync with the consumer than most chains do and recovers faster from its stumbles.

Of 33 analysts who follow Gap, 23 rate it a lowly “hold.” That may not sound bad, it's analyst-speak for “well, she has a nice personality.” At 14 times earnings, I think Gap stock is attractive.

Will these five picks enable my Old Faithful series to continue its winning streak? I can never be sure, but I know this screen has served me well over the years.

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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