I’ve found my Old Faithful stock screen to be a geyser of good ideas over the past two decades.
I use Old Faithful constantly in my work. Once a year, I write a column about some of the stocks it highlights.
To make it into Old Faithful, a stock much jump six hurdles:
- A return on stockholders’ equity (a measure of profitability) of 15% or better.
- Stock price no more than 15 times per-share earnings.
- Stock price no more than 2.0 times revenue
- Stock price no more than 2.0 times book value (corporate net worth per share).
- Earnings growth averaging 10% or better in the past five years.
- Debt less than stockholders’ equity.
A 17% return
The average 12-month return on those picks has been 17.3%, versus 5.8% for the Standard & Poor’s 500 Index. That’s based on 17 columns published from 1999 to the present.
Of course, not every stock Old Faithful spurts out is a winner. Of the 17 columns, 12 beat the S&P 500 and five trailed.
Last year Old Faithful fizzled, suffering a loss of 26.02%. Nary a one of my five picks advanced. The S&P 500 was also down, but only by 2.86%. Hawaiian Holdings Inc. (HA, Financial) was my worst clunker, with Phillips 66 (PSX, Financial) also posting a big loss.
Bear in mind that my column recommendations are hypothetical: they don’t reflect actual trades, trading costs or taxes. These results shouldn’t be confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future results.
Of the 2,115 stocks with a market value of $500 million or more, 35 presently meet Old Faithful’s criteria. Of course, the looming coronavirus recession will knock down profits at many of them. Here are five that I think will survive the gathering storm.
Snap-on
Snap-on Inc. (SNA, Financial) sells tools to car mechanics and other professionals. If the recession that probably started in March proves to be nastier than consensus expects, people won’t be buying many new cars. But they will have to keep their current cars running, so repair shops may be busy.
The stock currently sells for just under 10 times recent earnings, compared to a 10-year average of about 17. Its return on equity last year was near 20%.
Snap-on has been increasing its dividend steadily in recent years. I like that, as dividend increases are a good sincerity barometer indicating management’s faith in a company’s growth. The dividend yield is 3.5%, a lot better than you get at the bank.
Allstate
Even if they are sheltering in their homes, people need to insure those homes, and their cars as well. Allstate Corp. (ALL, Financial), one of the nation’s largest insurance companies, currently sells for 7 times earnings, as opposed to a normal multiple of about 13.
Allstate has been profitable in 14 of the past 15 years (the exception was everyone’s least-favorite year, 2008). Last year it earned a return on stockholders’ equity of 19%, which is very strong.
Comfort Systems
Comfort Systems USA Inc. (FIX, Financial) installs and maintains HVAC systems – heating, ventilation and air conditioning – mainly for commercial and industrial buildings. New installations will probably suffer in the coming recession, but maintenance should go on, and maintenance is at least half of revenue.
Over the past 10 years, the Houston-based company's shares have sold for a median of 23 times earnings. Today they fetch only 10 times earnings. Other valuation measures are also near five-year lows. I think the stock is probably timely.
Acuity Brands
I can’t figure out how Acuity Brands Inc. (AYI, Financial) will be impacted by the looming recession. The company, based in Atlanta, makes lighting systems for commercial, industrial, institutional and residential use.
Acuity stayed nicely profitable through the Great Recession. It has a 19-year profit streak going. The shares currently fetch 11 times earnings, less than half the average 10-year multiple of about 25.
Two of the best-known hedge fund managers in the U.S., Ray Dalio (Trades, Portfolio) of Bridgewater Associates and Jim Simons (Trades, Portfolio) of Renaissance Capital, have recently bought Acuity shares.
Southwest Airlines
For patient capital, I like Southwest Airlines Co. (LUV, Financial), down from $58 in mid-February to under $30 now. I think 2020 will be a year of torment for the airlines. But I figure Southwest is one of the strongest, and should survive.
Southwest’s debt-to-equity ratio is 41%, compared to 161% for Delta Air Lines Inc. (DAL, Financial) and 177% for United Airlines Holdings Inc. (UAL, Financial). The ratio can’t be calculated for American Airlines Group Inc. (AAL, Financial), whose equity currently is negative.
In the good old days of 2015 to 2019, when people were actually flying, Southwest earned 23% or better on stockholders’ equity every year.
Disclosure: I own shares of Allstate for some of my clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
