Summer is upon us, and after pandemic weight gains, few people will rate a “Perfect 10” on the beach this year. But my Perfect 10 Portfolio is ready to show off.
This hypothetical portfolio contains 10 stocks, each of which sells for 10 times earnings. For example, MKS Instruments earned $10.27 a share in profits the past four quarters, and its stock sells for $99.51 a share, so the price-earnings ratio is 9.7, which rounds to 10.
The long-term average price-earnings multiple in the U.S. stock market is about 15, so a ratio of 10 is relatively cheap. And that’s my point. As a partisan of value investing, I’m drawn to cheap stocks.
Perfect 10 record
The Perfect 10 Portfolio you’re reading about today is the 20th one I’ve compiled. The previous 19 have averaged a one-year return (including dividends) of 19.9%. That clobbers the average one-year return for the Standard & Poor’s 500 over the same periods, which was 9.8%.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
Last year’s Perfect 10 group did poorly. It lost 15.4%, while the S&P lost 9.8%. Big declines in LL Flooring Holdings Inc. (LL, Financial), Turtle Beach Corp. (HEAR, Financial) and Zumiez Inc. (ZUMZ, Financial) doomed the performance.
Over the years, the portfolio has outperformed the index 12 times out of 19, and has been profitable 15 times.
Will the Perfect 10 Portfolio return to form in 2022-23? I certainly hope so. Here are 10 stocks that make up its new roster.
BOK Financial Corp. (BOKF, Financial) is a banking company built around the Bank of Oklahoma. I have mixed feelings about bank stocks. The Federal Reserve is raising short-term interest rates. Banks want long-term rates to be high and short-term rates to be low. But BOK has many strengths and I like it at $76 a share, down from $106 late last year.
Cavco Industries Inc. (CVCO, Financial) produces factory-build homes. Given that there is pent-up demand for houses, and that the average new home is too pricey for many potential buyers, I think this stock is timely. Cavco’s return on invested capital has been above 10% (my preferred zone) six years in a row, and growth has accelerated lately.
Devon Energy Corp. (DVN, Financial) explores for and produces natural gas and oil. The energy industry cut back its well count a lot in the bad times. Now it is reaping the rewards of high oil and gas prices. With a market value of $36 billion, Devon is the largest company in the Perfect 10 Portfolio this year.
Heritage-Crystal Clean Inc. (HCCI, Financial) offers parts cleaning, used-oil recycling and waste disposal services to small and medium-sized businesses. It has been profitable in 13 of the past 15 years, and had a 16% return on invested capital last year. Only six analysts follow it; five rate it a buy.
Korn Ferry (KFY, Financial) is one of the largest U.S. employment agencies. Its return on invested capital has been above 10% only sporadically. Last fiscal year it was 21%. I think the stock may be timely, given the fact that employers say they are having trouble and recruiting enough employees.
Markel Corp. (MKL, Financial) is a property and casualty insurer that emphasizes specialty policies. (For example, my firm bought its professional liability insurance from Markel.) It invests some of its capital in non-insurance businesses such as homebuilding and bakery equipment making.
MKS Instruments Inc. (MKSI, Financial) makes instruments and controls used in a variety of industries. Among its customers are the defense, semiconductor and pharmaceutical industries. It has increased its sales at better than a 16% annual clip for the past decade, and profits have grown faster than sales.
Rush Enterprises Inc. (RUSHA, Financial), based in New Braunfels, Texas, is the largest truck dealer in North America. In the past decade, its revenue has grown at a 7% annual pace and earnings at 15%. Since an economic slowdown seems likely and a recession possible, this stock is a long-term, not short-term, play.
SSR Mining Inc. (SSRM, Financial) mines for gold and silver in the U.S., Canada and Argentina. I like its low debt level (only 13% of stockholders’ equity). Earnings have been spotty – nine profits and six losses in the past 15 years. But revenue and earnings have been strong lately.
1-800-Flowers.com Inc. (FLWS, Financial) delivers flowers or food baskets to pretty much anywhere in the country. It has shown a profit 11 years in a row. Seven Wall Street analysts follow the stock, and six rate it a buy.
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].