Mon May 09 2016
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My “Old Faithful” Stocks Have Averaged a 23% Return

I call it “Old Faithful.”

It’s one of the stock screens I use regularly to find investment candidates. To pass the Old Faithful screen, a stock must meet seven criteria:

  • Market value of $ 250 million or more.
  • Price less than 15 times per-share earnings.
  • Price less than 2 times book value (corporate net worth per share).
  • Price less than 2 times per-share revenue.
  • Return on stockholders’ equity in the past fiscal year of 15% or more.
  • Earnings growth averaging 10% or better the past five years.
  • Debt less than stockholders’ equity.

When I ran the screen last weekend only 19 stocks qualified. I’ve selected five of them to recommend.

Track Record

Why should you care about Old Faithful? I’ve published 13 previous columns based on this screen. My recommendations drawn from it have beaten the Standard & Poor’s 500 Index 11 times out of 13 on a one-year total-return basis.

  • Warning! GuruFocus has detected 4 Warning Signs with GBX. Click here to check it out.
  • GBX 15-Year Financial Data
  • The intrinsic value of GBX
  • Peter Lynch Chart of GBX

The average one-year return on my Old Faithful recommendations has been 23.8%. By comparison, the average was 4.3% for the S&P 500.

Outperformance of that magnitude is probably at least partly luck. Bear in mind that past performance doesn’t necessarily predict future results.

The results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients.

Now it’s time for some new picks drawn from the Old Faithful reservoir.

Greenbrier

Railcar manufacturers are having a tough time now. Shipments of coal, traditionally, a major cargo, have tailed off as natural gas (transported by pipeline) remains a cheap alternative.

It happens that Greenbrier Cos. (NYSE:GBX) specializes in almost every kind of rail car except for coal-carrying cars. The company’s revenue in the past four quarters was $ 2.9 billion, up from $ 1.8 billion in 2013. Yet the stock has fallen to about $ 30 now from about $ 70 less than two years ago.

Today’s price is only 10 times the earnings analysts expect for the coming year, and four times recent earnings. I think Greenbrier is a bargain.

Marine Max

Also facing a difficult environment is MarineMax Inc. (NYSE:HZO) of Clearwater Florida, a retailer of recreational boats. The nation’s recovery from the economy crisis of 2007-2009 has been too tepid to inspire confidence, and you have to feel pretty confident to go out and buy a boat.

MarineMax is not generating nearly as much money as it did in 2003-2007, its glory years. But it has shown moderate progress in the past five years, and the latest quarter looked pretty good. The stock is selling for nine times earnings, compared to a 10-year median of nearly 19.

Sanmina

Languishing at five times earnings is Sanmina Corp. (NASDAQ:SANM) of San Jose, California, a contract manufacturer of circuit boards and other technology products. The company has labored – frankly, is still laboring – to achieve growth. However, it has strengths.

For example, its return on stockholders’ equity in the past four quarters was 27%, which is excellent. Its debt ratio, with total debt only about a third of stockholders’ equity, is also very good.

In the heyday of technology stocks, back in 2000, Sanmina shares traded above $ 300 for several months. Today they are below $ 24, which is five times recent earnings and 0.3 times revenue – attractive ratios.

Valero

Are today’s low oil prices good or bad for refiners like Valero Corp. (NYSE:VLO)? The answer is: both.

If oil producers are cutting back production, they will be shipping less oil to be refined. However, for refiners, oil is a raw-material cost. They make their money on the spread between the price of gasoline (or home heating oil or jet fuel) and the price of oil.

These mixed messages have been reflected in the choppy price action of refining stocks, Valero included. But when I see high profitability (a 27% return on equity) coupled with a cheap stock price (five times recent earnings), I’m interested.

JetBlue

Airline stocks tend to rise when the price of oil (and hence jet fuel) is falling. Oil bottomed in January at about $ 29 a barrel and is now back up to around $ 42. So why do I still like airline stocks?

Simply, I believe that the airlines — including JetBlue Airways Corp. (NASDAQ:JBLU), which popped up in the Old Faithful screen – will post good profits for the next year or two. The industry has consolidated, and I believe that oil will stay in a trading range of $ 40 to $ 60, a far cry from the $ 100 highs of mid-2014.

Disclosure: I own Valero for most of my clients and personally. I own Greenbrier for a couple of clients, JetBlue and MarineMax for one client.

About the author:

John Dorfman founded Dorfman Value Investments in 1999. Previously he was a Senior Special Writer for The Wall Street Journal, executive editor of Consumer Reports, and a managing director at Dreman Value Management. His syndicated column appears on Tuesdays in the Omaha World Herald and Pittsburgh Tribune Review.


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