Stocks provide a touch of sanity
My Sane Portfolio was designed in 1999 as a fairly conservative, middle-of-the-road group of a dozen stocks. These were supposed to be stocks that would make you some money but let you sleep at night.
After 12 years of history, this approach is living up to its name. It has made money 11 years out of 12 and beaten the Standard & Poor's 500 Index seven years out of 12. I have compiled this portfolio each August from 1999 through 2006, and 2010 to the present.
Last year's Sane Portfolio returned a solid but unexciting 12.5 percent from Aug. 6 through Aug. 1. During the same period, the S&P 500 returned 15.8 percent.
For the full 12 years, the Sane Portfolio has averaged 11.5 percent a year, compared with 7 percent for the S&P 500.
Bear in mind that past performance doesn't predict future returns. The performance of my column recommendations is hypothetical and doesn't reflect taxes or transaction costs. And the results of my column picks shouldn't be confused with the returns I generate for clients.
To be considered for the Sane Portfolio, a stock must meet seven criteria. No criterion is especially demanding, but together, they are.
• A market value of $1 billion or more.
• Recent profitability, with a return on stockholders' equity of 10 percent or more in the latest year.
• A bit of earnings growth, with a five-year growth rate of at least 5 percent.
• A stock price no more than 18 times earnings.
• A stock price no more than three times revenue per share.
• A stock price no more than three times book value (corporate net worth per share).
• Debt less than stockholders' equity.
From the eligible stocks (usually a few dozen), I use judgment to select some that I think have good appreciation potential and that give the portfolio balance by industry.
Once it's in, a stock remains in each year, as long as it continues to meet the eligibility criteria.
This year, in Sane Portfolio XIII, there are seven stocks returning from last year's dozen. Exxon Mobil Corp. (XOM) is back for a fifth consecutive year.
Western Digital Corp. (WDC), a disk drive maker that I own for virtually all my clients, is back for a fourth appearance. Cisco Systems Inc. (CSCO) is in for a third time.
Back for a second time are Agco Inc., (AGCO), which makes and sells farm equipment; National Oilwell Varco Inc. (NOV), which manufactures oilfield equipment; Norfolk Southern Corp (NSC), a railroad; and World Fuel Services Corp. (INT), which provides fuel, maps and other services for planes and boats.
Five stocks that graced the portfolio in the past didn't make it back this year. Buckeye Technologies was acquired by Georgia Pacific, while Dell Inc. went private in a leveraged buyout. Profitability deteriorated at Cubic Corp. (CUB), Mosaic Co. (MOS) and Timken Co. (TKR).
That gives me five open spots to fill in this year's Sane Portfolio.
My first new selection is BHP Billiton PLC (traded in the United States as an American Depositary Receipt with the symbol BHP). The Australian mining giant produces iron ore, oil, coal, potash and many other natural resources. It sells a lot of these materials to China, and so is widely considered a China play.
Second, I will add Chubb Corp. (CB) to a portfolio devoid of financial stocks. Chubb, based in Warren, N.J., is a property and casualty insurer. I believe that housing and auto sales will rise in the coming year, giving Chubb more houses and cars to insure.
Speaking of housing and autos, my next two picks fall into those industries. I like D R Horton Inc. (DHI), a homebuilder based in Fort Worth. Horton is more diverse than most of its competitors, both geographically and in the range of price points it covers with its houses.
In autos, I will go with Magna International Inc. (MGA) of Aurora, Ontario, Canada. It supplies parts to most of the major car manufacturers worldwide. Auto sales in the United States are rebounding strongly now. I own Magna shares for almost all of my clients.
Fifth, I opt for Northrop Grumman Corp. (NOC) of Falls Church, Va., a maker of warplanes and military electronics. With tensions high in Iran, Iraq, Israel and the Ukraine, and with Russia and China flexing their military muscles, I believe that defense stocks may do well the next few years.
Here's a toast to Sane Portfolio XIII. May it contribute to your sanity — and your returns.
John Dorfman is chairman of Thunderstorm Capital LLC in Boston. He can be reached at firstname.lastname@example.org.