'Sane Portfolio' bests S&P 500 with 19% return
Score one for sanity.
My “Sane Portfolio” achieved a 19.36 percent return over the past year (Aug. 9, 2016, through July 28), beating the Standard & Poor's 500 Index, which notched a 15.60 percent return.
I launched the Sane Portfolio in 1999 and have returned to it most years since then. It is intended to be a moderately conservative portfolio.
To be eligible for membership in this portfolio, a stock must clear seven hurdles. No one of them is very hard, but few stocks can clear all seven.
This year, Magna International Inc. (MGA), a Canadian car-parts maker, is making its fourth appearance on the Sane roster. JetBlue Airways Corp. (JBLU) is back for a third time.
To be eligible for the Sane Portfolio, a stock must jump seven hurdles:
• Market value of $1 billion or more.
• Stock price 18 times earnings or less.
• Earnings growth averaging at least 5 percent per year the past five years.
• Profitability (measured by return on stockholders' equity) of 10 percent or better in the latest fiscal year.
• Stock price 3 times revenue or less.
• Stock price 3 times book value (corporate net worth) or less.
• Debt less than stockholders' equity.
Seven stocks didn't make it back this year, including last year's two biggest winners. The big gain for Lam Research pushed it just above 18 times earnings. Sanderson Farms didn't quite make the earnings-growth cut.
In 15 previous outings, the average 12-month return for The Sane Portfolio has been 10.4 percent, compared to 8.6 percent for the Standard & Poor's 500 Index. The portfolio has beaten the index eight times and has been profitable 13 times.
Last year's good performance owed a lot to a 76 percent gain in Lam Research Corp., which makes semiconductor equipment. Sanderson Farms Inc. (SAFM), a chicken producer, chipped in a 45 percent return.
The worst loser was Foot Locker Inc. (FL), which fell nearly 20 percent. It is back, nevertheless, for a second year because it still passes all seven tests.
This year I have seven spots to fill on the Sane roster. I will start with CVS Health Corp., which I think is doing a nice job of rebranding itself as a health-promotion company, not just a drug store.
Next, I will pick Sinopec Shanghai Petrochemical Co. (SHI), a Chinese chemical company that trades in the U.S. and in Hong Kong. The stock looks cheap at 7 times earnings, and offers a dividend yield of more than 6 percent.
A debt-free choice is Urban Outfitters Inc. (URBN). Like most brick-and-mortar retailers, it is fighting for its life against internet merchants. But I think it is further along than most in making the Net its friend.
Nearly debt-free is Gentex Corp. (GNTX), which makes self-dimming car mirrors and rear-view cameras. Its revenue has grown steadily in the past five years, and earnings have also (though less steadily) trended upward.
Growing rapidly, partly through acquisitions, is Centene, a managed-care company that specializes in serving poor and disabled patients, mainly through Medicaid. Revenue may surpass $50 billion next year, up from about $11 billion in 2013.
Tyson Foods Inc. (TSN) has been growing its prepared-food business very rapidly, but its larger businesses of selling beef and chicken have shown almost no growth lately. The company has a good history of profitability, and I think it's attractive at its recent price of about $63.
Carnival Corp. (CCL), one of the world's largest cruise-ship operators, has been on a nice growth trajectory lately.
Disclosure: I own Lam Research and Sanderson Farms for most of my clients and personally. I own Sinopec Shanghai for one client and Magna International for one client.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.