John Dorfman: New way to gauge a value
Value investing, the art of combing the stock market for bargains, is partly a matter of intuition and feel. But it's also a matter of ratios.
The numerator in the ratio is usually a stock's price. The denominator can be any measure of intrinsic value.
Earnings per share and book value (assets minus liabilities per share) are the most commonly used value measures.
Perhaps the third most popular measure is sales (or revenue) per share. The price-sales ratio is more resistant to manipulation than the price-earnings ratio, and it is especially useful for spotting turnaround candidates.
I often look for stocks selling for less than 1.0 times revenue, and I rarely buy a stock with a price-revenue ratio higher than 2.0.
Beginning in 1998, I have written 11 columns recommending stocks with low price-sales ratios. (The one you are reading is the 12th.)
On average, these low price-sales stocks have risen 45.4 percent in the year after publication, compared with 7.4 percent for the Standard & Poor's 500 Index. The average was pulled way up by great years in 2000-2002, when the method seemed to work especially well.
Bear in mind that past performance doesn't predict future results. The performance of my column recommendations is hypothetical and doesn't reflect trading costs or taxes. Also, the results of column recommendations shouldn't be confused with those of portfolios I manage for clients.
My picks in this paradigm have beaten the S&P 500 in seven of the 11 outings. Last year was one of the years when my selections trailed the index, returning 16.1 percent compared with 19.6 percent for the S&P.
My best choice last year was Phillips 66 (PSX), a refiner, which rose 41 percent including dividends. My worst was Stewart Information Services Corp. (STC), a title insurance company, which was up 1 percent.
In between were Magellan Health Services Inc (MGLN), up 7 percent; Nam Tai Property Inc. (NTP), up 10 percent; and World Fuel Services Corp. (INT), up 20 percent.
Now, let us continue the quest. Here are five new picks with low price-sales ratios.
Shares of Travel Centers of America LLC (TA) climbed to more than $40 a share briefly in 2007. Today, the stock languishes between $8 and $9, which is less than 0.1 times sales and eight times earnings.
Based in Westlake, Ohio, the company owns and franchises highway-stop restaurants, and operates truck repair and maintenance stations. Owned restaurants include Iron Skillet and Country Pride. Franchised outlets include Arby's, Burger King, Pizza Hut, Starbucks and others.
The company has problems: That's why the stock is cheap. Travel Centers had to delay a recent quarterly report while it resolved accounting issues. It posted losses in 2009 and 2010. Last year, profits fell slightly below those of the year before.
I see turnaround potential here. And the stock is so cheap that I think odds favor the investor.
I like refiners in general now, because I believe the group is excessively out of favor. Worries include an increase in oil prices (for refiners, a raw material) and the slight loosening of the restriction against exports of oil. (That restriction had given U.S. refiners a cost advantage.)
Valero Energy Corp. (VLO) seems attractive to me at 0.2 times sales and nine times earnings.
The nation's largest stationery store, Staples Inc. (SPLS) is one of the largest internet retailers. Office customers can order their supplies online and get delivery in a day or two. The stock is a fallen angel, selling for about $11 after trading above $40 about 20 years ago.
Sales have been flat for five years, and earnings have dropped slightly. The company is going into cost-cutting mode. But I think the stock may be a good buy at 0.3 times sales and 13 times earnings.
Visteon Corp. (VC) is an auto parts maker, spun off years ago from Ford Motor Co. I own a couple of Visteon's competitors (Magna International and Lear) for most clients. But I believe the whole group has momentum, because there is pent-up demand for new cars.
Visteon is inexpensive at 0.6 times sales and eight times earnings. It has improved its balance sheet, which now holds $1.7 billion in cash, which is a billion more than a couple of years ago.
I will close with Sanderson Farms Inc. (SAFM), a chicken farming company with headquarters in Laurel, Miss. The company earned more than 20 percent on stockholders' equity last year and has very little debt. The stock looks compelling to me at 0.9 times sales and 12 times earnings.
John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at firstname.lastname@example.org.
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