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John Dorfman
John Dorfman
Articles (112)  | Author's Website |

Stocks Worth 'Only' a Billion Dollars Are in a Sweet Spot

What’s so special about a stock with a market value of $1 billion?

October 25, 2017 | About:

What’s so special about a stock with a market value of $1 billion?

Nothing, except it’s a size I relish.

By my market taxonomy, $1 billion is the dividing line between small-capitalization stocks and mid-capitalization stocks. (Large-cap stocks are $10 billion and up.)

I’m fond of the $1 billion territory in the stock market because it’s a zone where many stocks are just beginning to be discovered by institutional investors. So once a year I like to highlight a few stocks in this zone that look attractive to me. I call it the Billion Dollar Portfolio.

Before today, I’ve compiled 12 iterations of this portfolio (2001-2006 and 2011-2016). The average 12-month return (including dividends) has been 18.4%, compared to 12.0% for the Standard & Poor’s 500 Index.

Ten of the 12 columns have shown a positive return and nine have beaten the S&P 500.

Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.

Last Year

My Billion Dollar Portfolio from a year ago rose 36.0%, versus 22.6% for the S&P 500 from October 25, 2016 through October 20, 2017. The best gainers were Autohome Inc. (ATHM), a Chinese auto-information firm, HFF Inc. (HF), a financial firm serving the real-estate industry, and Employer Holdings Inc. (EIG), a workers’ compensation insurer.

Losers included Knoll Inc (KNL), a maker of furniture and textiles, and SpartanNash Co. (SPTN), a grocery distributor.

Here are five new selections in the billion-dollar range. Two of the five do business mainly in China, making the Billion Dollar Portfolio a rather risky collection this year.

Kelly Services

Conventional wisdom says that demand for temporary workers is strongest early in an economic recovery. So, it’s no surprise that, as the current recovery in the U.S. ages, investors have lost interest in Kelly Services Inc. (NASDAQ:KELYA).

According to Bloomberg, only one analyst – from little known Northcoast Research – actively follows the stock, and he’s neutral. Yet Kelly’s return on equity looks better than it has in many years, and the company is debt-free. With the stock just below book value (corporate net worth per share), I like it.

Farmers & Merchants

Farmers & Merchants Bank of Long Beach (FMBL) has never been exceptionally profitable, but it’s been consistently profitable. The stock, which has a very low beta (volatility measure), has crept up seven years in a row, and will probably make it eight this year.

In a hare-versus-tortoise world, this one is definitely a tortoise. But the stock, which is owned by several money managers I respect, seems to me a good buy at 1.1 times book value. Lovers of low-priced stocks beware: Each share costs about $7,780.

Caesarstone

An Israeli stock that interests me is Caesarstone Ltd. (NASDAQ:CSTE), which makes quartz kitchen countertops and related products. Sales have marched steadily upward and are quite well distributed among the U.S., Australia and Canada. Earnings, however have stalled in the neighborhood of $2 a share.

Of course, it’s preferable to see both sales and earnings rising nicely. But I have hopes that the earnings will catch up to the sales. Meanwhile, the balance sheet is strong, is very little debt.

China Yuchai

Based in Singapore, China Yuchai International Ltd. (NYSE:CYD) makes, sells and services diesel engines in China. I do not believe that the world’s second-biggest economy has finished growing, and I figure that diesel engines will be a key component of its commercial system for a good number of years.

China Yuchai’s stock sells for less than tangible book value, and less than 10 times earnings. It yields 3.8% in dividends, and it seems to me that there is ample room to raise the dividend.

Both sales and earnings are choppy, as is the stock-price action. It’s not unusual for this stock to decline 50% in a year – or to advance more than 100%.

Yintech Investment

Yintech Investment Holdings Ltd. (NASDAQ:YIN), based in China, provides an online trading forum for the trading of commodities such as gold and silver.

Yintech was incorporated in the Cayman Islands, has its headquarters in Shanghai, and in 2016 did a U.S. stock offering with Jefferies & Co. as lead underwriter.

I like three things about Yintech: It is debt free. Its stock trades at only 7 times recent earnings. And it offers a 5.5% dividend yield.

Disclosure: I own China Yuchai for a few of my clients.

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].

About the author:

John Dorfman
John Dorfman founded Dorfman Value Investments in 1999. Previously he was a Senior Special Writer for The Wall Street Journal, executive editor of Consumer Reports, and a managing director at Dreman Value Management. His syndicated column appears on Tuesdays on this website and also in the Pittsburgh Tribune Review, Ohio.com, Virginian Pilot, and Omaha World Herald.

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