John Dorfman: 5 stock choices from my ‘Old Faithful’ screen
My “Old Faithful” stock screen is one of my favorites. I’ve written 16 columns about Old Faithful, beginning in 1999. The average one-year gain has been 19.99%, compared to 6.33% for the Standard & Poor’s 500 Index over the same periods. Figures are total returns including dividends.
Twelve of the 16 columns have been profitable, and 12 have beaten the S&P 500.
Of course, my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Last year was one of my four flops. My Old Faithful picks lost 15.04% in the latest 12 months, while the S&P 500 returned 13.07%. Covenant Transportation Group Inc. (CVTI) and Sinopec Shanghai Petrochemical Co. (SHI) were my biggest losers. But that won’t stop me from trying again.
How it works
To make the Old Faithful screen, a stock needs:
•A return on stockholders’ equity (a measure of profitability) of 15% or better.
•A stock price no more than 15 times earnings.
•A stock price no more than 2.0 times revenue.
•A stock price no more than 2.0 times book value (corporate net worth per share).
•Earnings growth averaging 10% or better the past five years.
This year the market is a little pricey. So, among the 2,777 U.S. stocks with a market value of $300 million or more, only a dozen made the grade. I recommend five of them.
Boasting one of the soundest balance sheets among homebuilding companies, D.R. Horton Inc. (DHI) is also one of the largest homebuilders. Based in Arlington, Texas, it builds homes in 26 states — everything from starter homes to luxury ones.
Will millennials buy houses with the fervor their parents did? Skeptics say that younger people prefer cities to suburbs and apartments to houses. Also, they are encumbered with student loans.
Maybe, but I believe millennials will be more similar to their parents than many people suspect. As they have children, they will increasingly want to own homes.
The largest stock that meets the Old Faithful criteria is Walgreens Boots Alliance, a chain of roughly 10,000 drug stores in the U.S. and Britain. I have been accumulating the stock this year as its price has fallen. Why is it down? Two reasons seem paramount to me.
Many Democratic politicians have endorsed Bernie Sanders’ call for Medicare for All — in essence, national health insurance. Typically, Medicare pays less than private insurance for drugs, doctors and hospital stays.
Also, Britain’s pending exit from the European Union poses a recession risk for Britain, home to the Boots part of Walgreens Boots Alliance.
I like the stock nevertheless. The threats are speculative, while Walgreens’ history of growth and profitability is solid. Even assuming a Democratic party presidential victory, any national health insurance proposal will have to be fought out in Congress, which will involve delay and compromise.
Refining is a funny industry. Shares of refiners often rise and fall with oil prices. Yet, for refiners who aren’t also engaged in exploration and production of oil, you could argue it should be the opposite. For them, oil is a raw material.
Phillips 66 (PSX) is one of the largest of the pure refiners. At 13 refineries, it processes more than 2 million barrels a day of oil into gasoline, jet fuel and heating oil.
There are big barriers — chiefly environmental concerns and community opposition — to building new refineries. That gives a certain scarcity value to the ones that already exist.
At eight times earnings and 0.4 times revenue, I think Phillips 66 stock is cheap and a bargain.
I’m not wild about the airline industry any more. I was a few years ago, when falling jet-fuel prices and industry consolidation provided useful tailwinds.
Those blessings are gone, but I still think Hawaiian Holdings Inc. (HA) looks good at the moment. It has grown its revenue at 9% a year for the past decade. And the stock is pleasantly cheap, at eight times this year’s estimated earnings.
The lowest ratio of debt to equity (7%) in the entire group of Old Faithful stocks belongs to Miller Industries (MLR) of Ooltewah, Tenn., a maker of tow trucks and car carrier trucks. It has six factories, four in the U.S, one in France and one in Britain.
Miller is a small company in a mature industry. Yet somehow it has managed to grow its revenue at better than an 11% clip over the past 10 years — and earnings faster than that.
Disclosure: I own Walgreens Boots Alliance shares personally and for most clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Mass., and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached via email.