– In 1999 I started the Sane Portfolio, intended as a medium-risk, slightly conservative cluster of a dozen stocks.
To be eligible for the Sane Portfolio, a stock must pass seven tests. It must:
- Have a market value of $1 billion or more
- Sell for 18 times earnings or less
- Show earnings growth averaging at least 5% a year the past five years
- Boast profitability (return on stockholders’ equity) of 10% or better in the latest fiscal year
- Sell for 3 times revenue or less
- Sell for 3 times book value (corporate net worth) or less.
- Have debt less than stockholders’ equity
From the eligible stocks (usually a few dozen, 101 this year), I select the members of the Sane Portfolio. Once in, a stock stays in until it fails to meet one of the criteria.
Past Results
Following the tradition of the Super Bowl, I have given roman numerals to these portfolios. Last year’s was Sane Portfolio XIII. Perhaps that was an unlucky number. I was caught with two energy stocks and one natural-resource stock in a year when oil and commodity prices plunged.
As a result, my Sane Portfolio achieved a total return of only 3.0% from August 5, 2014 through July 31, 2015. That trailed way behind the 11.8% return on the Standard & Poor’s 500.
The long-term picture is brighter. In 13 outings, the Sane Portfolio has averaged a 10.8% return. The return on the S&P 500, including dividends, for the same 13 one-year periods, is 8.2%. The Sane portfolio has beaten the S&P seven times out of 13, and shown a profit 11 times.
Bear in mind that the results of my column picks are hypothetical and don’t reflect actual trades, trading costs or taxes. Past performance doesn’t predict future results. And the performance of my column picks shouldn’t be confused with that portfolios I manage professionally..
In and Out
This year, eight of the dozen Sane Portfolio stocks retained their spots. Western Digital Corp. (WDC, Financial), which I own for clients and personally, is back for a fifth consecutive year.
Cisco Systems Inc. (CSCO, Financial), the computer networking giant, is back for a fourth time. Returning for a third go are National Oilwell Varco Inc. (NOV, Financial), Norfolk Southern Corp. (NSC) and World Fuel Services Corp. (INT).
Back for seconds are Chubb Corp. (CB), an insurer; D R Horton Inc. (DHI), a homebuilder; and Magna International Inc. (MGA), an auto-parts maker.
Four stocks got the boot. Agco Corp. (AGCO, Financial) just missed the profitability cut. BHP Billiton Ltd. (BHP), which mines iron ore, gold and coal, suffered in the global commodity slide. Exxon Mobil Corp. (XOM) languished as oil fell from near $100 a barrel to near $50. Northrop Grumman, after a 43% rise, poked through a couple of the valuation limits. (I still own Northrop Grumman for clients and personally.)
So, it’s time to induct four new members into the Sane Portfolio.
The Andersons
I’ll start with The Andersons (ANDE, Financial), an agricultural conglomerate that has given me nothing but trouble since I purchased it for clients in December. The company trades in grain and ethanol and stores them. It also leases railcars and repairs locomotives, and recently bought the crop nutrient group of Kay-Flo Industries. Only seven Wall Street analysts follow The Andersons, and only three of them like it. But I do, especially at 12 times earnings and 0.24 times revenue.
Cooper Tire
Another stock I own for clients (and personally) is Cooper Tire & Rubber Co. The company, based in Findlay, Ohio, sells replacement tires through tire stores and gas stations. From 2013 to the present, the average age of cars on U.S. roads has remained above 11 years. In that environment, the need for replacement tires should be robust.
Cummins
I am restoring to the Sane Portfolio Cummins Inc. (CMI, Financial) of Columbus, Indiana, a maker of diesel engines. Cummins was previously in this portfolio in 2006-2007. It stands out for its profitability: Last year it earned about 22% on stockholders’ equity.
Jet Blue
I’ll wrap it up with an airline, JetBlue Airways Corp. (JBLU, Financial). Mergers have greatly reduced the number of major airlines, and airlines have also cut flights on less-travelled routes. Consequently planes are flying fuller, which is good for profitability. In addition, the price of jet fuel has been cut by about half in the past 13 months, and jet fuel is roughly a third of costs for many airlines. So it’s a great time to be an airline, and JetBlue is one of the better operators.
