Dorfman: Gems lie in stagnant stocks
Some investors like to snap up a stock on good news. Others, contrarians like me, prefer to buy on bad news.
Not many people seek to buy when there's no news. Yet a stock that's been stagnant can sometimes be a good buy.
That's the idea behind my whimsical “Do Nothing Club,” conceived on a lazy spring day in 1999. The Do Nothing Club contains stocks that haven't done anything lately but that I believe may do something pretty soon.
The main requirement to make the Do Nothing Club is that a stock must be almost unchanged in price from where it was a year ago.
Last year, I recommended three Do Nothing stocks, with these results: Avnet Inc. (AVT) gained 27 percent; National Oilwell Varco Inc. (NOV) returned 19.2 percent; and Bank of Hawaii Corp. (BOH) was up 16.1 percent.
The average for the three Do Nothing recommendations was a 20.7 percent gain, compared with 16.2 percent for the Standard & Poor's 500 Index. All figures are total returns including reinvested dividends.
So far, I've compiled 10 Do Nothing Club rosters. On a one-year basis, they have been profitable nine years out of 10 and have beaten the S&P 500 seven times.
The average one-year return has been 11.4 percent compared to 5.7 percent for the index.
The average three-year return (in the eight cases in which that figure can be compiled) has been 28.3 percent, versus 5.6 percent for the index.
Bear in mind that past performance doesn't predict future results. The performance of my column recommendations is theoretical and doesn't take taxes or transaction costs into account. And the column results shouldn't be confused with those of portfolios I run for clients.
And now it's time for me to climb into my stock-picking hammock and make some Do Nothing selections for 2014-15.
Of more than 3,000 stocks with a market value of $250 million or more, only 142 were within 2 percent of where they were a year ago. I have selected three for your leisurely consideration.
One is Chevron Corp. (CVX), the second-largest American oil company. Based in San Ramon, Calif., Chevron has operations worldwide. Its market value of $238 billion is second only to Exxon Mobil Corp.'s $438 billion.
Selling for 12 times earnings in a market with a multiple of 19, Chevron seems to me a solid holding. It would probably hold up well if the market turns downward because it offers a 3.4 percent dividend yield. It has a strong balance sheet, with debt less than 16 percent of stockholders' equity.
Despite the recent boom in oil and gas from shale formations, the trend for the past four decades has been that oil has been increasingly hard to find. With its geological expertise and financial muscle, I believe Chevron will be in a strong position for the next few years.
If you're a farmer and you need a tractor, combine harvester, plow, sprayer or any of a host of other items, you might well head to Agco Corp. (AGCO). The Duluth, Ga., company makes a wide variety of farm equipment, which it sells under the names Massey Ferguson, Challenger, Fendt and other brands.
The stock touched $70 in 2007 when both the general economy and the farm economy were gunning ahead. Today, it trades near $55, which is just 10 times prevailing estimates of this year's profit. At that multiple, it wouldn't take a lot of good news to move the stock forward.
Agco's biggest problem is competition from Deere & Co. (DE), which has been eating Agco's lunch in Brazil and is a tough competitor everywhere. But Deere has debt that is more than three times equity, whereas Agco's debt is only one third of equity.
Over the years, I've had made some good returns investing in specialized insurance companies when they were modestly valued. One candidate that might fit that description now is Navigators Group Inc. (NAVG) of Stamford, Conn.
As its name suggests, Navigators specializes in marine insurance. It will insure your boat or its cargo, or insure you against liability if your ship plows into someone else's pier. It also offers other specialized coverages such as errors and omissions insurance and directors' and officers' insurance.
No one would claim that property and casualty insurance is a safe or steady arena. Yet Navigators has been consistently profitable — even though the size of its profits swings widely. The shares are selling below book value (corporate net worth per share), and at 11 times earnings.
John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at email@example.com.