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John Dorfman
John Dorfman
Articles (207)  | Author's Website |

D.R. Horton and Brooks Automation Show Value Plus Momentum

These 4 stocks all sell for 15 times earnings or less, and have advanced at least 21% in the past three months

Looking for a stock that's on the move, but isn't too expensive?

I have a few to suggest.

The four stocks I am recommending today all sell for 15 times earnings or less, and have advanced at least 21% in the past three months, which is 10 percentage points better than the Standard & Poor's 500 Index.

D.R. Horton

I could kick myself. Early in the current recession, I sold homebuilder D.R. Horton Inc. (NYSE:DHI), reasoning that it got murdered in the last recession (2007 to 2009) and would at least be hurt in this one.

What I missed is that the pandemic might actually spur demand for houses, since suburban living is more conducive to social distancing than city living is. Also, if one might be forced to work at home, the choice of home becomes even more important.

So, contrary to my expectations, D. R. Horton has done just fine, up 45% in the past three months, beating the Standard & Poor's 500 Index by about 34 percentage points. Horton shares are still reasonably priced, at 14 times earnings.

Templeton Dragon

Up 28% in the past three months is Templeton Dragon Fund (NYSE:TDF), a closed-end investment fund that normally invests about 45% in China, 20% in Japan and 35% in various other Asian countries. It has averaged better than 16% annual total return in the past five years.

Unlike mutual funds, which are their cousins, closed-end funds trade on an exchange just like stocks, and may sell at a premium or discount to the value of their holdings. Templeton Dragon usually sells for a discount, currently a little wider than usual at about 16%.

Michael Lai has run this fund for about 15 years. The expense ratio is 1.35%, which is a little high for people (and there are many) who are fanatics about preferring low expense ratios. Personally, I think that consideration is overblown.

Alacer Gold

Although based in Denver, Alacer Gold Corp. (ALACF) mines for gold mainly in Turkey. It is in the process of merging with SSR Mining Inc. (TSX:SSRM) of Vancouver, Canada, which has mines in Nevada, Canada and Argentina.

The merger is billed as a merger of equals. The company will keep the SSR name, but headquarters will be in Denver, Alacer's home. Rod Antai, CEO of Alacer, will be the CEO.

Alacer shareholders will get 0.3246 shares of the new SSR for each Alacer share held. Collectively, they will own 43% of the new company.

I like the merger because it gives the combined company greater geographical diversity. I see some political risk in Turkey, which has touchy relations with the U.S.

I expect gold to do well because of central banks are printing money copiously, U.S.-China relations are tense, and real interest rates are low.

Brooks Automation

Many aspects of semiconductor manufacturing require vacuum chambers or clean rooms. Brooks Automation Inc. (NASDAQ:BRKS), based in Chelmsford, Massachusetts, provides equipment to create these conditions, and also provides other equipment to the semiconductor industry.

The semiconductor equipment industry is notorious for boom and bust cycles. However, Brooks has managed to increase its book value (corporate net worth per share) by about 8% a year over the past five fiscal years, and 7% over the past 10 years.

Brooks has debt equal to only 7% of equity, an admirable ratio that could prove invaluable if the nation goes through a longer and tougher recession than many people currently anticipate. The stock is up close to 27% in the past three months, and sells for only about eight times earnings.

Track record

Beginning in 2000, I've written 37 columns (including today's) on stocks that possess both value and momentum. The average 12-month return on my recommendations in this series is 11.8%, a couple of points better than the 9.4% average for the Standard & Poor's 500.

Of the 35 columns, 25 were profitable and 18 beat the S&P 500.

My picks from a year ago returned 23.3%, thanks to good gains in Bio-Rad Laboratories Inc. (NYSE:BIO) (up 54%) and Pulte Group Inc. (NYSE:PHM) (up 48%). Auto Nation Inc. (NYSE:AN) also had a gain, but Allstate Corp. (NYSE:ALL) and Micron Technology Inc. (NASDAQ:MU) declined. Collectively my picks beat the S&P 500, which was up 18.0%.

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.

Disclosure: A fund I manage owns call options on Micron Technology.

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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