I've never seen the Old Faithful Geyser in Yellowstone National Park, but I'm grateful to it.
Years ago, I named one of my stock screens (computerized stock-picking aids) after it. And it has indeed served me faithfully.
I use the screen to help pick stocks for clients, and once a year I write a column featuring some stocks it highlights. On the previous 18 columns, the average 12-month gain has been 21.7%. That compares well with 8.0% for the Standard & Poor's 500 Index over the same periods.
My Old Faithful choices have beaten the index 13 times out of 18, and have been profitable 13 times.
Bear in mind that my column results 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 five Old Faithful stocks I recommend now.
The Biden administration is unlikely to overhaul the U.S. health care system in the next couple of years, since it will probably be preoccupied with the pandemic, infrastructure, taxes and budget issues. Therefore, Cigna Corp. (CI, Financial), the big health insurer, will operate much as it has.
Over the past decade, Cigna has grown its earnings at almost a 15% annual clip. Revenue growth has been faster than that, and free cash flow faster yet. Nonetheless, the stock sells for about 11 times earnings, which looks like a bargain to me.
A debt-free company, First American Financial Corp. (FAF, Financial) is the second-largest title insurance company in the U.S., with approximately a 23% market share. (The largest is Fidelity National Title Insurance Co.)
Title insurance is typically required to buy a home, and I expect the volume of home sales to increase in the next couple of years. It is also required for some refinancing transactions. First American has a 13-year profit streak going, and profits have been increasing lately.
A small homebuilder, Green Brick Partners Inc. (GRBK, Financial) is active in Texas, Florida, Georgia and Colorado. It owns a controlling interest in five homebuilding companies in Dallas and one in Atlanta. It also has a stake in other homebuilders, plus an interest in two mortgage companies and two title insurers.
David Einhorn (Trades, Portfolio), head of the hedge fund Greenlight Capital, is a major shareholder, which I view as a plus. The stock sells for only 11 times earnings, even though earnings have grown nearly 23% a year for the past five years.
Profits at a supermarket company are usually steady but not spectacular, and that has usually been true of Ingles. Lately, profits have jumped because the pandemic means more meals are cooked at home. I don't expect the high profits to last, but the stock is modestly valued at 6 times earnings – hard to resist.
Some people think of Allstate as stodgy just because it's been around for a long time. Yet it has grown its earnings at a 22% annual pace over the past 10 years. Debt is reasonable, and the stock sells for only 7 times recent earnings.
With almost any casualty insurer, hurricanes are a threat. But if there is a bad hurricane season and the stock drops, I'd buy more.
How it works
To pass the Old Faithful screen, a stock must:
- Have a return on stockholders' equity of 15% or better.
- Sell for 15 times earnings or less.
- Sell for 2 times book value (corporate net worth) or less.
- Sell for 2 times revenue per share or less.
- Show at least 10% earnings growth over the past five years.
- Have debt less than stockholders' equity
My picks from a year ago did well, as the stock market recovered from a trough spurred by the Covid-19 pandemic. Three of my five picks advanced more than 100% – Comfort Systems USA Inc. (FIX, Financial), Acuity Brands Inc. (AYI, Financial) and Southwest Airlines Co. (LUV, Financial).
Disclosure: I own Allstate and Green Brick Partners for one or more clients, but not personally.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, 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].