John Dorfman: Welcome to the GARP feast
Between the aggressive arena of growth stocks and the bargain-basement world of value stocks lies GARP territory, or “growth at a reasonable price.”
Make no mistake, I am a value guy. But once a year, as Thanksgiving passes, I loosen my criteria (and my belt) to make room for some GARP stocks in this column.
Generally, I consider a stock to be in value territory if it sells for 15 times per-share earnings or less. I consider it a growth stock if it commands a price of 20 times earnings or more. As for the 15-20 range, that’s GARP land.
I’ll lead off my 2018 GARP roster with Laboratory Corp. of America Holdings (LH). The company conducts more than half a million medical tests a year. Chances are good that your doctor or your hospital uses them. Through its Covance subsidiary, acquired in 2015, the company also does drug development work.
In the past 20 years, Lab Corp. stock has gone from a little over $3 a share to about $161. If the stock market continues to struggle, Lab Corp. should prove at least somewhat defensive, as the health care segment usually holds up well in declines.
From Arlington, Va., comes CACI International Inc. (CACI), which provides computer services, cybersecurity work and surveillance systems to the Department of Defense and other federal agencies. It also does work for state and local governments, and a little for corporations.
In the past 19 years, CACI shares have climbed from a little over $8 a share to about $175 now.
Some of CACI’s work is secret, which makes the company hard to analyze. That’s one reason the shares sell for only 1.0 times revenue in a market where the prevailing multiple is two times revenue.
A large conglomerate with an aerospace emphasis, Textron Inc. hails from Providence, R.I. Bell helicopters, Beachcraft and Cessna planes, Arctic Cat all-terrain vehicles, E-Z-Go golf carts and Shadow drones are among its many products.
Textron has about $14 billion in sales, and the stock market values it at a little over $13 billion, making it a bargain from a price-to-sales perspective.
Analysts expect the company’s sales and earnings to rise this year and next. Conglomerates are a bit out of favor with investors these days, but I think Textron deserves a higher stock price than it has.
No large brokerage houses follow Central Garden & Pet Co. (CENT) of Walnut Creek, Calif. (The four small houses that follow it all recommend it.)
As its name might suggest, Central Garden makes pet and garden supplies. Four Paws pet food and Pennington seed are among its products.
Central Garden’s market value is $1.7 billion, and its sales nicely exceed that figure, at about $2.2 billion. The consensus among analysts is that the company will earn $1.91 a share this year, more than quintuple the earnings of four years ago.
I’ll close with a risky contrarian pick, intensely hated by Wall Street. Heartland Express Inc. (HTLD) is a short- and medium-haul trucking company from North Liberty, Iowa. Of 12 analysts who cover it, seven rate it “hold” and five say “sell.” That is one of the gloomiest sets of ratings I’ve ever seen.
The stock has obvious flaws: Revenue will probably come in at about $618 million this year, down from $871 million four years ago. Yet there are strengths, to which Wall Street pays little attention. The company is debt-free and earned a respectable return on stockholders’ equity last year — 15.7 percent.
Today’s GARP recommendations are the 18th GARP feast I’ve laid out, beginning in 1998. The average gain on recommendations from the first 17 columns has been 12 percent, compared to 8.4 percent for the Standard & Poor’s 500 Index.
My GARP picks have beaten the S&P 500 Index 11 times out of 17 and have been profitable 11 times.
Bear in mind that 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.
Three of the five GARP stocks I picked a year ago lost ground in a slippery market. The biggest loser was Applied Materials Inc. (AMAT), down 38 percent. The best gainer was Pfizer Inc., up 25 percent. Overall, I had a 2.7 percent loss while the S&P 500 showed a 2.3 percent return.
Disclosure: I own shares of Pfizer for several clients, but not personally.
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 at email@example.com .