Many investors put most of their money in the largest companies. I'm fond of companies that straddle the borderline between small and mid-sized.
I define large-capitalization stocks as those with a market value over $10 billion, mid-cap stocks as $1 billion to $10 billion and small-cap stocks as those under $1 billion.
I like the vicinity around $1 billion. At that size, a stock is small enough that it hasn't yet been "discovered" by a lot of Wall Street firms, but big enough to have some heft and staying power.
To illustrate this concept, each year I construct what I call my Billion Dollar Portfolio. It features 10 companies that are near that sweet spot. The average one-year return on the previous 15 such portfolios has been 14.4%, compared to 11.8% for the Standard & Poor's 500 Index.
Ten of the 15 portfolios have beaten the S&P 500, and 12 have been profitable.
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.
Here are 10 stocks hovering near my billion-dollar sweet spot now.
City Holding Co. (CHCO, Financial) is the parent to City National Bank in Charleston, West Virginia. One mark of merit for a bank is a return on assets above 1%. City Holding has exceeded that mark in each of the past 15 years. The stock also offers a nice dividend yield, 3.7%
Down 18% in the past year, Encore Wire (WIRE, Financial) may now be at a good buy point. Based in McKinney, Texas, the company makes electrical building wire. It is debt free, a quality I always like, and especially like during a recession.
Green Brick Partners Inc. (GRBK) is a homebuilding company based in Plano, Texas. I'm bullish on the homebuilding industry and I respect David Einhorn (Trades, Portfolio), a hedge fund manager who is a prominent investor in this company.
Malibu Boats Inc. (MBUU, Financial) makes "performance sports boats" for waterskiing, waterboarding and wake surfing. It has a nice growth record, but I passed on it in March when the recession started, reasoning that such boats are frills during a recession. Guess what? The stock is up 54% this year. Profits did weaken in the June quarter, however.
Debt-free is Netgear Inc. (NTGR, Financial), a San Jose, California-based company that makes computer networking equipment. It has very little debt (6% of stockholders' equity) and 7 times as much cash as debt. The stock sells for less than 1.0 times revenue. The company showed a profit in 14 of the past 15 years.
Based in Houston, Orion Engineered Carbons SA (OEC, Financial) produces rubber carbon black, used in making car tires. It also makes carbon black, used as a pigment. The company's CEO, Corning Painter, bought $635,000 of its stock in September.
Based in Cypress but listed directly on the New York Stock Exchange, Qiwi Plc (QIWI, Financial) offers electronic payment systems in Russia, Eastern Europe, the United Arab Emirates and other countries. It has reported a profit in each of the past 10 years, and offers a dividend yield of 6.1%. I think it's risky but interesting.
Smith & Wesson
Firearms are loved by some, abhorred by others. Smith & Wesson Brands Inc. (SWBI, Financial) is a leading maker of hunting rifles and handguns. It has debt of only 15% of stockholders' equity, and has almost as much cash as debt. Gun control? I'm in favor, but I think it won't happen.
Stewart Information Services Corp. (STC, Financial) was on this list last year, and turned in a 16% gain (respectable, but a fraction below the S&P 500). I think that title insurance, Stewart's specialty, is one of those highly profitable but unglamorous niches that are often overlooked.
Semiconductor manufacture requires extraordinarily clean environments, and that is where Ultra Clean Holdings Inc. (UCTT, Financial) gets its name. The company, based in Hayward, California, makes a variety of equipment for semiconductor manufacturing. It posted a loss last year, but appears to be on the comeback trail.
My Billion Dollar Portfolio picks from a year ago gained 4.6%, but trailed the S&P 500, which notched a 16.2% return. My best pick was Livent Corp. (LTHM), a lithium producer and processor, which returned 55%. My worst was National Western Life Group Inc. (NWLI), down 30%.
Disclosure: I own Green Brick Partners for one of my clients.
John Dorfman is chairman of Dorfman Value Investments in Boston. His firm of clients may own or trade securities discussed in this column. He can be reached at [email protected].