After a drop of about 20% in the first six months of this year, investors feel nervous even though July has been good.
This might be a good time to look at my Sane Portfolio. It is a hypothetical portfolio of 12 stocks. I started compiling it in 1999, and have done a new one almost every year since then. Today I’ll unveil Sane Portfolio XXI.
It’s intended to be a middle-of-the-road, slightly conservative portfolio. If the consensus forecast is right, and we are in a recession or soon will be, I believe this portfolio might hold up well. To be eligible for inclusion in the Sane Portfolio, a stock must surmount seven hurdles. None of them by itself is especially hard, but to jump all seven hurdles is difficult.
- Market value of at least $1 billion.
- Debt less than stockholders’ equity.
- Return on invested capital of 8% or better. (This criterion was recently revised.)
- Stock price less than 18 times per-share earnings.
- Stock price less than 3 times per-share sales.
- Stock price less than 3 times book value (corporate net worth per share).
- Five-year earnings growth averaging 5% or better.
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Once I choose a stock for the Sane Portfolio, it automatically stays in unless and until it fails to meet one of the seven criteria.
This year, seven stocks make it back, while five have to be replaced.
Tyson Foods Inc. (TSN, Financial) is back for a sixth consecutive year. It’s the largest U.S. producer of beef and chicken, and also a major producer of pork. I think it will be relatively resilient if the economy or the market slide further.
D.R. Horton Inc. (DHI, Financial), the largest U.S. homebuilding company, makes the Sane Portfolio for the third consecutive year. I was fond of this stock, but now am less so as rising mortgage rates make home purchases less affordable.
Back for a second time are Amkor Technology Inc. (AMKR, Financial), which provides packaging and test services to semiconductor makers, Encore Wire Corp. (WIRE, Financial), which makes electrical wiring and cable, and Laboratory Corp. of America Holdings (LH, Financial), a leading medical testing company.
Five companies stumbled on one or more hurdles and were kicked out. They are Allstate Corp. (ALL, Financial), Cigna Corp. CI), MarineMax Inc. (HZO, Financial), Johnson Outdoors Inc. (JOUT, Financial) and Synchrony Financial (SYF, Financial). Allstate had been on the roster four times, Cigna three.
To replace the departing companies, I’ve chosen five new stocks. One is Mueller Industries Inc. (MLI, Financial), which makes refrigerator coils and other metal products. It has grown earnings at a 30% clip the past five years and has little debt, yet the stock sells for only six times earnings.
Boise Cascade Co. (BCC, Financial) makes engineered wood products used in homebuilding. Even though I expect homebuilding activity to slow down, Boise has been spectacularly profitable in recent years. If profits fall by more than half, they’ll still be good.
Columbia Sportswear Co. (COLM, Financial) earned a high return on invested capital last year, and has nice low debt (22% of equity). Its earnings growth rate has been above 11% in the past five years.
As a speculation, I’ll throw in SSR Mining Inc. (SSRM, Financial), which mines gold and silver in Nevada, Canada and Argentina. Precious metals stocks haven’t done as well as I expected in the past year, but SSR is up a smidge, which is more than most stocks can say.
My 20 previous Sane Portfolios have averaged a one-year return of 10.5%. That edges out the Standard & Poor’s 500 Total Return Index, which averaged 9.7%.
Eleven of my 20 columns beat the index, and 15 were profitable.
My selections from a year ago declined 0.2% while the index dropped 5.5%. The worst performer was Johnson Outdoors, down about 45%. The best was Encore Wire, up close to 62%.
Caveat: My column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
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].