Perhaps you've seen the Energizer Bunny in a battery commercial. It is "still going" long after you'd expect it to fade.
That bunny is the namesake for my Bunny Portfolio, a hypothetical stock portfolio I created in 1999. These are stocks that have shown rapid earnings growth (25% or better) in the past five years, yet paradoxically sell for a modest 12 times earnings or less.
Investors obviously expect these stocks to run out of juice. However, since people – even experts -- are notoriously bad at predicting the future, I figured that a fair number of these stocks would continue to enjoy success.
I don't choose the stocks in the Bunny Portfolio by judgment. A computer program does the picking. I just set the parameters: market value of $250 million or more, five-year earnings growth of 25% or better and a stock price of 12 times earnings or less.
Usually about three dozen stocks meet these criteria. From these, the paradigm selects the five with the fastest earnings growth and the five with the lowest price-earnings ratio.
The record
I've compiled a Bunny Portfolio 19 times now (20, counting this column). In the early years, it did well, as I expected. In recent years, however, it has been on a losing streak, as value investing -- the philosophy behind it -- has languished.
The average gain on my Bunny stocks has been 13.3%, which compares well with 9.6% for the Standard & Poor's 500 Index over the same 19 periods.
However, the Bunny hasn't beaten the S&P since 2013. In 19 tries, it has beaten the index eight times and been profitable 12 times. In the past 12 months (Dec. 9, 2019 through Dec. 9, 2020), the Bunny hopped to a 9.2% gain, but that trailed the 19.3% total return on the S&P 500.
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.
New bunny
Here are the 10 stocks that make the Bunny Portfolio for the coming 12 months. They are listed alphabetically.
Bio-Rad Laboratories Inc. (BIO, Financial) makes equipment for medical labs. It's done well during the pandemic, with earnings more than doubling in the past year and the stock up more than 59%. I like the balance sheet, with debt only 7% of stockholders' equity.
Equity Commonwealth (EQC, Financial) is a real estate investment trust based in Chicago. It owns office buildings throughout the U.S. especially in Austin, Chicago, Denver and Philadelphia. Over the past few years, it has extinguished its debt. The big question: Will people come back to urban offices after the pandemic?
First Foundation Inc. (FFWM, Financial), out of Irvine, California, provides banking and wealth management services and does real estate lending. It has a very high Piotroski F-Score (basically intended as a measure of timeliness), eight out of a possible nine.
LGI Homes Inc. (LGIH, Financial) is a homebuilder specializing in the low-priced end of the single-family house market. The pandemic has given people an incentive to get out of the crowded cities into suburban homes. For many of those people, a low-priced home is the best, or only, option.
MSG Networks Inc. (MSGN, Financial) broadcasts New York Knicks and New York Rangers games (plus other content) to New York state and parts of surrounding states. While the Bunny paradigm picks this stock, I dislike it because of the company's high debt. Corporate net worth has been negative since 2016.
MVB Financial Corp. (MSBF, Financial) of Fairmont, West Virginia is a banking company in the mid-Atlantic region. For bank stocks, I like to see a return on assets over 1.0%. Last year MVB hit 1.48%, but it had never exceeded 1.0% in the previous 14 years.
PennyMac Financial Services Inc. (PFSI, Financial) isn't a government-sponsored enterprise (GSE). It's a private company. But it performs mortgage servicing tasks for Fannie Mae and Freddie Mac, GSEs that buy mortgages from lenders. The stock has risen 75% in the past year, but the company's debt is huge.
Next are a pair of pipeline and storage companies, Phillips 66 Partners LP (PSXP, Financial) and Shell Midstream Partners (SHLX, Financial). Both are master limited partnerships and might complicate your tax return. However, both appear attractive to me, selling at about eight times earnings.
Tronox Holdings PLC (TROX, Financial) mines titanium dioxide used in paints and coatings. It shows up on this list because it has swung from loses to a big gain recently. But it's hard more losses than gains, so I wouldn't sleep well if I owned it.
Disclosure: I own LGI Homes personally and for most of my clients. A private partnership I manage has a short position in MSG Networks.
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].
