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John Dorfman
John Dorfman
Articles (198)  | Author's Website |

The Perfect 10 Portfolio Rides Again

Over many decades, but not lately, stocks with low price-earnings ratio tend to be the best buys

In 2015, one year before he became president, Donald Trump remarked that supermodel Heidi Klum was “sadly, no longer a 10.” Klum good-naturedly responded by wearing a T-shirt marked 9.99.

What is always a 10? My Perfect 10 Portfolio. It contains 10 stocks, each of which is priced at 10 times the past four quarters’ earnings per share.

To bargain hunters, that’s an attractive ratio. U.S. stocks usually sell for about 15 times earnings. Today, with interest rates low and investors’ hopes high, they command 22 times earnings.

Over many decades, but not lately, stocks with low price-earnings ratios tend to be the best buys.

My Perfect 10 Portfolio has done well over the years. The average one-year return for 17 columns has been 19.1%, well above the 9.1% on the Standard & Poor’s 500 Index.

The Perfect 10 Portfolio has beaten the S&P 11 times out of 17 -- but not last year. It has been profitable 14 times.

Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.

These days, there aren’t a great many stocks selling for as little as 10 times earnings. Those that do have problems – but in those cases where the problems can be solved, a nice capital gain may await. Here are this year’s 10 stocks.

Buckle

Based in Kearney, Nebraska, Buckle Inc. (NYSE:BKE) retails clothing, shoes and accessories. “It goes without saying that this was the most challenging quarter we ever faced,” CEO Dennis Nelson said of the latest quarter. But the company has done well long term, making the stock an interesting speculation.

Farmer & Merchants

Farmers & Merchants Bancorp. (FMCB) is a small bank based in Lodi, California. One rule of thumb for banks is that a return on assets over 1.0% is good. This bank has exceeded that mark in 14 of the past 15 years, and just missed it the other time. Insiders here tend to be buyers of their own stock.

Franklin Resources

The rise of index funds has been bad for most mutual fund companies. But I think good days will come again for stock pickers, and Franklin Resources Inc. (NYSE:BEN) has a lot of talent in house. The company has about $6 billion in cash, against $1.3 billion of debt.

Meritage Homes

Meritage Homes Corp. (NYSE:MTH) was going great guns before the coronavirus epidemic. It’s hard to say how things will go next, but the first quarter, which was partially virus-afflicted, wasn’t bad. Meritage had big losses in the 2007 to 2009 financial crisis. But it’s shown a profit in nine of the 10 years since.

Mohawk Industries

A leading carpet and tile maker, Mohawk Industries Inc. (NYSE:MHK) has traditionally commanded a multiple of about 21, as compared with 10 now. We are in a recession of unknown length and severity; presumably people will buy less carpet. But the stock has been punished a lot -- down 34% in the past year.

Oshkosh

I’ve long been a fan of Oshkosh Corp. (NYSE:OSK), which makes lifts, fire engines, garbage trucks and military transport vehicles. I’m not sure how timely the stock is now, because I expect both federal and municipal budgets to be pinched by the recession. But I think the company is a good long-term investment.

Raymond James

Years ago, I inaugurated a feature in The Wall Street Journal in which we ranked the performance of brokerage houses’ recommended lists. Raymond James (NYSE:RJF) usually did well, which caused me to respect the firm – a respect that endures today. The stock usually trades for about 17 times earnings; today it is 10.

Southwest Airlines

I don’t expect airlines to thrive until a cure for Covid-19 is found. But Southwest Airlines Co. (NYSE:LUV) has always struck me as the highest-quality stock in an often shaky industry. Before the epidemic struck, it had registered five very good years in a row. Unlike many airlines, its debt seems under control.

Stoneridge

Stoneridge Inc. (NYSE:SRI), out of Novi, Michigan, makes electronic components for cars. The auto industry is stalled. But the trend has been for cars to incorporate more and more electronics, and this should work in Stoneridge’s favor. Return on equity has been high (over 20%) five years in a row…pre-pandemic.

United Therapeutics

Up to now, United Therapeutics (NASDAQ:UTHR) has made excellent profits with drugs to address pulmonary hypertension. But one of its key drugs is now off patent, and two other patents expire in 2026 and 2027. Buying this stock is an expression of faith in the company’s research pipeline.

Disclosure: I own Oshkosh shares personally and in a hedge fund I manage.

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].

About the author:

John Dorfman
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 on this website and also in the Pittsburgh Tribune Review, Ohio.com, Virginian Pilot and Omaha World Herald.

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