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Dorfman: Value selections can be shrewd

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Tuesday, Aug. 26, 2014, 12:01 a.m.
 

An old Wall Street saying goes, “What's the difference between being early and being wrong? There isn't any.”

Value investors — the bargain hunters of the investment world — are often early. As a card-carrying member of the value investing school, I am as guilty of this as my peers are. Sometimes I buy stocks that have fallen into what I believe is bargain territory, only to watch them fall more.

Up to a point, that's just the normal risks of the value style. But to avoid the curse of buying too early, some investors insist on buying stocks that offer a bit of momentum, along with value. About twice a year, I offer recommendations for stocks that meet that description.

The record

Today's column is the 25th in my “Value Plus Momentum” series, which began in 2000. Twelve-month results can be calculated for 23 of these columns. On average, my “value plus momentum” choices have returned 20.9 percent including dividends, compared with 8.2 percent for the Standard & Poor's 500 Index.

My picks have been profitable 19 times out of 23 and have beaten the index 15 times.

Bear in mind that past performance does not predict future results. The performance of my column recommendations is theoretical and doesn't take into account taxes or trading costs. The results of my column picks should not be confused with the returns I earn for clients on real portfolios.

The selections from a year ago rose 36.5 percent from Aug. 27, 2013, through last Friday. That compares with a 24.5 percent return for the S&P 500.

Leading the way was Western Digital Corp. (WDC), a stock I own for almost all of my clients. It returned 66.9 percent. Microsoft Corp. returned 39.6 percent; KKR & Co., 31.3 percent; and Capital Southwest Corp., 8 percent.

New picks

Now for some fresh meat. Here are five stocks that I believe combine value and momentum. Each sells for 15 times earnings or less and has shown better than average price action in the past 13 weeks and 52 weeks.

National Oilwell Varco Inc. (NOV) provides a wide array of equipment and services to oil companies and drillers. The company is highly respected, is more than a century and a half old, is consistently profitable and has debt less than 15 percent of equity.

At the moment, you can buy National Oilwell shares for 15 times recent earnings and 12.5 times estimated 2015 earnings. For a company of this quality, I consider that an attractive entry point. A much smaller energy company I like is Warren Resources Inc. (WRES), a small oil company based in New York City. It has interests in oil and gas fields in California, New Mexico, Texas and Wyoming.

At 13 times earnings, Warren looks attractive to me. Keep an eye on its debt level, though. Debt was recently 35 percent of stockholders' equity, which I consider fine. But the pending issuance of new bonds will push the debt ratios up.

Sanderson Farms Inc. (SAFM) of Laurel, Miss., is a major chicken producer, competing for grocery-store space with rivals such as Tyson Foods Inc. (TSN) and privately held Perdue Farms Inc. I have recommended this stock several times over the years and have owned it for clients in the past.

Sanderson's stock has risen 29 percent this year through August 22, but still sells for a moderate 11 times earnings. The company has been beating analysts' earnings estimates, and analysts have been scrambling to raise their estimates.

I also like Micron Technology Inc. (MU), which has advanced 53 percent this year but remains at less than half the price it commanded in mid-2000 during the heyday of technology stocks. The Idaho-based semiconductor manufacturer produces chips for a variety of uses, including cloud-based applications.

Micron has robust profit margins and earned a sparkling return on equity last year, more than 38 percent. The stock sells for about 13 times recent earnings and less than 10 times estimated earnings for fiscal 2015.

Lastly, auto parts maker Visteon Corp. (VC), a division of Ford Motor Co. until it was spun off in 2000, is priced temptingly at eight times recent earnings. Heavily dependent upon Ford at its birth, Visteon now supplies parts to more than a dozen carmakers. Only about a third of sales come from Ford.

I like the auto parts industry because I believe the United States is in the midst of a strong revival in car sales. The pace is more than 15 million cars and light trucks a year, but it was over 16 million for nine years in a row through 2007.

John Dorfman is chairman of Thunderstorm Capital LLC in Boston. He can be reached at jdorfman@thunderstormcapital.com.

 

 
 


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