My Bunny Portfolio, which has an admirable record since I launched it in 1999, fell on its face in the past year.
This hypothetical portfolio is named after the Energizer Bunny of battery-commercial fame, which was “still going” long after you would have expected it to stop. The portfolio contains 10 stocks that have shown superb earnings growth in the past, but are cheap because investors think their outlook is grim.
The theory behind the portfolio is that people are poor predictors of the future and therefore these companies’ success may continue. Obviously, this is a risky approach, since it involves betting that the majority is wrong. Then again, the majority often is.
In 2014-2015 the pessimistic consensus was right. My December 9, 2014 Bunny Portfolio contained half a dozen energy stocks and – just as the majority expected -- these did terribly. Overall, my list fell 6.68% and would have done even worse except that one of the stocks, Kodiak Oil & Gas, attracted a takeover offer. For comparison, the Standard & Poor’s 500 Index rose 3.68% including dividends.
- Warning! GuruFocus has detected 4 Warning Signs with CPN. Click here to check it out.
- CPN 15-Year Financial Data
- The intrinsic value of CPN
- Peter Lynch Chart of CPN
The bad year reduced the average annual return on my Bunny stocks to 18.7%, still way ahead of the S&P 500 at 5.3% for 14 one-year periods. The Bunny has beaten the index eight times out of 14, and has been profitable 11 times.
Bear in mind that 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. And past performance doesn’t guarantee future results.
How It Works
What is the anatomy of this stock-picking rabbit? Simply this:
- Start with all U.S. stocks with a market value over $250 million.
- Select those with earnings growth exceeding 25% per year in the past five years.
- Narrow the field to stocks selling for 12 times earnings or less.
- Form a 10-stock portfolio using the five stocks with the highest growth rate and the five with the lowest price/earnings ratio.
I don’t apply judgment in choosing the stocks. I set the parameters and the computer algorithm picks the securities. I have written about the Bunny Portfolio every December from 1999 to the present, excluding 2007 and 2008 when I was temporarily retired as a stock-market columnist.
Let’s see what the Bunny Paradigm suggests for the coming year.
Calpine Corp. (NYSE:CPN), based in Houston, Texas, operates 88 wholesale power plants throughout the U.S. It sells for only 10 times earnings even though earnings have grown rapidly in recent years. A sore point is its heavy debt load -- more than three times equity.
Chemtura Corp. (NYSE:CHMT) is a specialty chemical maker with headquarters in Philadelphia. It has seen rapid earnings growth in recent years but without any real revenue growth. At three times earnings, it’s tempting.
As an old-fashioned phone company in an old-fashioned city, Cincinnati Bell Inc. (CBB) doesn’t generate much enthusiasm from investors. Analysts expect earnings to fall next year, and most rate the stock a “hold.”
Federated National Holdings Co. (NASDAQ:FNHC) had a string of losses from 2008 through 2011, but has been gaining ground rapidly since then. The company, based in Sunrise, Florida, sells homeowners insurance, flood insurance and other property-and-liability coverage.
I like Goodyear Tire & Rubber Co. (NASDAQ:GT), as I expect strong sales of both new cars and replacement tires in the next year. Analysts are sharply divided on the Akron, Ohio, tire maker’s prospects.
Greenbrier Cos. (NYSE:GBX) in Lake Oswego, Oregon, makes railcars, especially freight cars and tank cars. This is a severely cyclical industry but I like its five-year prospects. At 5 times recent years and 7 times next year’s consensus, the stock looks attractive to me.
Hornbeck Offshore Services Inc. (NYSE:HOS) of Covington, Louisiana, serves a severely depressed oil-and-gas industry. The stock peaked at about $57 in mid-2013 and has fallen to near $10. Perhaps it’s early, but some smart money has started moving into this stock.
Another Philadelphia company on the list is Lannett Co. (LCI), a generic drug maker. Revenue growth has been good, earnings growth great. But many traders doubt the good times can last. The stock sells for nine times earnings, way below its 10-year average multiple of 27.
PHI Inc. (PHIIK) of Lafayette, Louisiana, is another company struggling amid the energy downturn. Its initials stand for Petroleum Helicopters International, and a big part of its business consists of ferrying men and materials to and from offshore oil platforms.
The list closes with Pilgrims Pride Corp. (PPV), one of the largest U.S. chicken producers. All chicken companies have been hurt by bird flu with year, but there is still a long-term trend for Americans to eat more chicken.
Disclosure: I do not currently own the stocks discussed in today’s column either personally or for clients.