“If you’re going to steal, steal from the best,” Woody Allen once said.
Once a year, I try to do that. My annual Purloined Portfolio features ideas I lift from other money managers.
My Purloined Portfolio from last year returned 45.9%, thanks mostly to gains in Alphabet Inc. (GOOGL, Financial) (idea courtesy of David Katz) and John Bean Technologies Corp. (JBT, Financial)(from Chuck Royce (Trades, Portfolio)). The Standard & Poor’s 500 Total Return Index was up 32.4%, so I beat it by about 13 percentage points.
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.
Long term, the 17 Purloined Portfolios I’ve cobbled together since 2000 have returned an average of 14%, versus 11.4% for the index.
Diamondback Energy
Now I’ll put on my black mask and do this again. The first idea, Diamondback Energy Inc. (FANG, Financial), is drawn from the portfolio of Scott Black (Trades, Portfolio), who heads Delphi Management in Boston.
Based in Midland, Texas, Diamondback weathered the long bear market for the energy industry better than most of its competitors. In the seven years through 2020, it managed a profit four times. And it emerged from the agony with less debt than many competitors.
One thing that worries me about Diamondback is that it’s a little too popular. Of 30 analysts who follow it, 28 rate it a “buy.” I don’t like to run with the herd, but in this case I think the analysts are right.
Walgreens Boots
From Randall Eley, who runs Edgar Lomax Co. in Alexandria, Virginia, I choose Walgreens Boots Alliance Inc. (WBA, Financial). A drugstore giant in both the U.S. and Britain, Walgreens has a notably cheapo stock. The shares go for 0.28 times sales and less than 10 times estimated earnings.
Eley also owns CVS Inc. (CVS, Financial), but I chose Walgreens because I think it’s more out of favor. Britain, home of the Boots chain, is in a bit of a shambles now, thanks to Brexit and the Delta variant. I think it will right the ship, creating a large profit opportunity.
Academy Sports
Ken Heebner (Trades, Portfolio), sometimes known as “Big Foot” for his aggressive trading style, is the portfolio chief at CGM Trust in Boston. One of his holdings that intrigues me is Academy Sports and Outdoors Inc. (ASO, Financial) from Katy, Texas.
Academy has some 259 stores, plus a website, selling fishing, camping and hunting gear, sports equipment and casual clothing. As befits a Texas outfit, it carries guns and ammunition.
Owned for several years by KKR, the big private equity firm, Academy went public again in 2020. Return on invested capital was puny at first, but has strengthened steadily, exceeding 25% in the latest quarter. Selling for seven times earnings, the stock appears very cheap to me.
Goldman Sachs
David Katz is chief investment officer for Matrix Asset Management in New York. From his holdings, I’ll pluck Goldman Sachs Group Inc. (GS, Financial), a prestigious brokerage house that just announced a blowout quarter.
Goldman has increased its earnings at better than a 16% annual the past five years. Its net profit margin has exceeded 30% in the past four quarters. It has more debt than I usually like, but considerably less than it carried in the years before the 2008 financial crisis.
The White House frequently taps Goldman executives for high government posts. (Robert Rubin, Steven Mnuchin and Henry Paulson spring to mind.) This to me is a big plus for the company, adding to its prestige and influence. On top of that, the stock is cheap, selling for about eight times earnings.
First Citizens
Wrapping up the portfolio, I’ll pick First Citizens BancShares Inc. (FCNCA, Financial), based in Raleigh, North Carolina. This bank company gets most of its deposits in the Carolinas, but makes loans in about half of the continental U.S.
I like to see a bank earn 1.0% or better on assets. First Citizens used to fall short of this mark, but has exceeded it in the past three years, and so far in 2021. Consistent profitability is appealing here: The company has shown a profit in each of the past 30 years.
Note that my knowledge of the managers’ holdings comes from public filings. It’s possible that one or more of them could have sold the stocks I selected.
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].
