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5 stocks that join value, growth

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Tuesday, July 29, 2014, 12:01 a.m.
 

Looks or character? Peace of mind or riches? Lose weight or eat a piece of chocolate cake?

Life seems to be full of dichotomies. But, sometimes, you can have both the things you want, even if they may seem at first like opposites.

For example, it's possible to find stocks that have the characteristics sought by both of the two leading — and often feuding — schools of investing. A stock can be a value stock and a growth stock.

Looking at stocks with a market value of $500 million or more, I screened for ones that show earnings growth averaging at least 10 percent annually for the past five years and more analysts raising earnings estimates than lowering them. Those are growth characteristics.

But I also looked for value, defined in this case as a stock price 15 times earnings or less. For good measure, I required that debt be less than stockholders' equity.

I'll give you my new picks in a minute. First, let's look at the record of this approach.

Solid history

I've written eight columns on stocks that combine growth and value. They were published in July 2001-2006, July 2010 and July 2013.

Of the eight sets of recommendations, seven have outperformed the Standard & Poor's 500 Index. All eight have been profitable.

The average gain on my “Value Plus Growth” recommendations has been 23.19 percent. In contrast, the average gain in the S&P 500 during the same eight 12-month periods has been 10.29 percent.

Alas, my recommendations from a year ago were the ones that failed to beat the S&P 500. Dillard's Inc. (DDS), with a 45 percent return, and Sturm Ruger & Co. (RGR), with a 22 percent return, did well.

But Chevron Corp. (CVX) trailed with a 10 percent return. Agco Corp. (AGCO) faltered with a loss of 3.9 percent. And Leapfrog Enterprises Inc. (LF), a maker of educational games and software, plunged 37 percent.

The average for all five stocks was 7.07 percent, well behind the 19.80 percent return on the S&P 500 for the period July 30, 2013, through June 15.

Please note these caveats: The performance of my column recommendations is theoretical and doesn't allow for trading costs or taxes.

Past performance doesn't predict future results. And the results of my column recommendations shouldn't be confused with the returns on portfolios I manage for clients.

I should also note that the precise criteria I use to define growth and value have changed slightly over the years, but, in my judgment, not significantly.

New picks

Let's see if we can get this train back on the express track. Here are five recommendations that I believe combine value and growth.

Exxon Mobil Corp. (XOM) is the largest of the 29 stocks that meet the criteria this year. I could have chosen Chevron again, as the stocks look similar. Exxon's balance sheet looks slightly stronger to me, and the number of analysts who are increasing their estimates on Exxon is slightly greater.

Delta Air Lines Inc. (DAL) has been making a comeback, in large part because the airline industry is consolidating. That leads to planes flying with fuller loads and to a reduction in cutthroat price competition.

Northrop Grumman Corp. (NOC) looks good to me as a balanced play on national defense. The defense group is selling for modest valuations because investors fear budget cuts.

In my opinion, those cuts are not quite over, but further cuts won't be severe, given the threats from Iran, the Islamic State of Iraq and Syria, Russia and China.

TRW Automotive Holdings Corp. (TRW) makes a variety of auto parts, notably seat belts, air bags, electronics and steering systems. As regular readers of this column know, I believe there is pent-up demand for new cars in the United States, where the average car is 11 years old.

Tyson Foods Inc. (TSN) seems to have caught on more than most food companies to the fact that Americans want convenience, quick-preparation food — and meat.

It is a leading producer of chicken, beef, pork and frozen meals incorporating them.

My philosophy

By temperament and philosophy, I'm a value investor, seeking stocks at a bargain price.

However, I recognize the merit of growth investing, supposedly the “opposing” school.

It intrigues me that some studies — admittedly now rather old ones — suggest that much of the return from either growth or value investing comes from those stocks that show characteristics of both. That's the motivation for this series of articles.

Now let's see if we can make it eight wins out of nine over the S&P.

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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