My "Sane Portfolio" gets a major shakeup this year.
As its name implies, the Sane Portfolio is intended as a moderately conservative portfolio. It’s a 12-stock portfolio that is revised annually.
To be eligible for membership in this portfolio, a stock must clear seven hurdles. No one of them is terribly hard, but few stocks can clear all seven.
Once I choose a stock to join the Sane Portfolio, it stays in unless and until it fails to pass one of the seven tests.
A year ago, most of the dozen stocks stayed in, but this year, only three are coming back: D.R. Horton Inc. (DHI, Financial), a homebuilder,Ă‚ Magna International Inc. (MGA, Financial), an auto parts maker, and JetBlue Airways Corp. (JBLU, Financial), an airline.
Eligibility
The seven hurdles are:
- Market value of $1 billion or more.
- Stock price 18 times earnings or less.
- Earnings growth averaging at least 5% per year the past five years.
- Profitability (measured by return on stockholders’ equity) of 10% or better in the latest fiscal year.
- Stock price three times revenue or less.
- Stock price three times book value (corporate net worth) or less.
- Debt less than stockholders’ equity.
Usually a few dozen stocks pass these tests. I use judgment to select a handful of them for the portfolio.
History
I started the Sane Portfolio in 1999 and have written about it every August since then except for a hiatus in 2007-2009. The portfolio you’re going to read about is Sane Portfolio XV. (I couldn’t resist using Roman numerals to mimic the Super Bowl.)
The average 12-month return for the Sane Portfolio has been 9.8% compared to 8.0% for the Standard & Poor’s 500 Index. In 14 previous outings, the portfolio has beaten the index seven times and been profitable 11 times.
Last year’s Sane Portfolio, however, incurred a loss of 4.0% while the S&P 500 gained 5.8%.
The biggest culprit for the bad showing was Western Digital Corp. (WDC), which fell 45%. It previously had been a five-time member of this portfolio and one of my favorite stocks to own for clients. Like many tech companies, it couldn’t move fast enough as consumers shifted to mobile devices.
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 performances I achieve for clients, and past performance doesn’t guarantee future results.
New blood
The past year has been tough for many businesses. Along with Western Digital, eight other stocks bit the dust and became ineligible in the past year.
They were Andersons Inc. (ANDE), Chubb Corp. (CB), Cisco Systems Inc. (CSCO), Cooper Tire & Rubber Co. (CTB), Cummins Inc. (CMI), National Oilwell Varco Inc. (NOV), Norfolk Southern Corp. (NSC) and World Fuel Services Corp. (INT).
So I am anointing nine new stocks in the Sane Portfolio this year.
I’ll start with Berkshire Hathaway Inc. (BRK.B, Financial), run by the redoubtable Warren Buffett (Trades, Portfolio). A capital gain is likely here. If I’m wrong, you still get to read Buffett’s incredibly intelligent and thoughtful annual reports.
Cal-Maine Foods (CALM, Financial), based in Mississippi, is the largest egg producer in the U.S. At the moment there is an egg glut, making the stock cheap, but that problem is temporary.
Foot Locker Inc. (FL, Financial) sells athletic shoes and apparel. One thing I like about it is that it carries very little debt.
Lam Research Corp. (LAM, Financial) is a leader in “etch,” a crucial step in the process of affixing microscopic wires into semiconductor chips.
Lear Corp. (LEA, Financial) makes seating and electrical systems for cars. It serves most of the major car manufacturers in the world.
PulteGroup (PHM, Financial) is a homebuilder that mostly constructs moderately priced homes. I like the whole industry but favor PulteGroup because it’s a little cheaper than most homebuilding stocks, and its balance sheet is a little stronger.
Sanderson Farms Inc. (SAFM, Financial), an old favorite of mine, is one of the larger U.S. chicken farming companies. The company has no debt.
Steelcase Inc. (SCS, Financial) makes desks and other office furniture. The stock hasn’t done anything in a long time, but it sells for modest valuations, and the company has been expanding its profit margin.
Rounding out the list, Waddell & Reed Financial Inc. (WDR) is a money-management firm based in Overland Park, Kansas. Selling for only nine times recent earnings, it seems like a bargain.
Disclosure: I own Cal-Maine, Pulte and Sanderson for most of my clients and personally. I own Lear for most clients, Berkshire Hathaway and Lam Research for some clients and Waddell & Reed for one client.
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