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John Dorfman
John Dorfman
Articles (128)  | Author's Website |

Boise, Archer-Daniels Look Cheap on This Gauge

My first boss in the financial industry hated the price-to-sales ratio

My first boss in the financial industry hated the price-to-sales ratio.

What difference does it make, he asked, if a stock is cheap compared to a company’s sales? What counts are a company’s profits, not its sales.

I’ve never understood why he felt so strongly about that. There are many gauges of a company’s intrinsic value. To me, sales (or revenue) is one of them.

Sure, a low price-to-sales ratio sometimes means that profits are anemic. But a new management or an improvement in the product line could change that. Thus, this ratio may point to turnaround candidates.

Here’s another reason to like the price-to-sales ratio: It’s harder for a company to manipulate sales figures than earnings figures.

Here are five companies that look attractive to me now based on their low price-to-sales ratios.

Boise Cascade

Boise Cascade Co. (NYSE:BCC), based in Boise, Idaho, makes wood products and building materials. Some of the joists and beams in your home may well come from this company.

The current price of about $46 is 0.4 times sales. The knock on the company is that it’s a slow grower. But it’s doing what a mature company should do, raising its dividend at a 10% annual clip for the past three years. The dividend yield is 2.7%, nothing to scoff at.

Archer-Daniels

A leading food and commodities processor, Archer-Daniels Midland Co. (NYSE:ADM) is up about 11% this year. But that only brings the shares to about where they were four years ago.

In recent years, Archer-Daniels has slimmed down, but become more profitable. I think that the next few months may be rough for the market, and this is traditionally a defensive stock. It sells for 0.4 times revenue, and yields 2.9% in dividends.

Cooper Tire

Next comes a stock that’s an old friend to readers of this column, Cooper Tire & Rubber Co. (NYSE:CTB). It makes replacement tires, which strikes me as timely in a year when U.S. driving miles are up and the age of the average car on the road is steady at about 11 years.

Cooper sells for 0.5 times revenue. Its balance sheet, which weakened during the financial crisis, is once again strong.

In market share for replacement tires, Cooper usually runs fifth in the U.S., behind Goodyear, Michelin, Firestone and Bridgestone. That can crimp pricing power, but Cooper’s profit margins have actually been increasing lately.

Valero

As mentioned, U.S. drivers are racking up more miles this year. That bodes well for Valero Energy Corp. (NYSE:VLO), a refiner that turns crude oil into gasoline, home heating oil and other products.

A possible kicker would be a winter that – following three consecutive winters of record warm weather – is cold. No, I do not deny the reality of global warming. But nothing moves in a straight line, and a reversion toward the mean would certainly help raise heating oil prices.

Miller Industries

Here’s a little stock that intrigues me. Miller Industries Inc. (NYSE:MLR), out of Ooltewah, Tennessee, makes tow trucks and car carriers. Hardly a crowded niche! So far as I can tell, not a single Wall Street analyst covers this stock.

Miller seems like a value to me, selling for 0.5 times revenue and 12 times earnings. The company has $15 million in cash, and only about $10 million in debt, a situation I love to see.

Track Record

This is the 16th column I’ve written on stocks with low price-to-sales ratios. Last year’s column produced a 29.3% return, versus 16.1% for the Standard & Poor’s 500 Index. Figures are total returns including dividends.

Two of my picks from a year ago rose 65% -- Valero Energy Corp. (which repeats this year) and America’s Car-Mart (NASDAQ:CRMT). Also helping was Omega Protein Corp, which was taken over by Cooke Inc. for a 34% gain.

My losers were CVS Health Corp. (NYSE:CVS) down 10%, and Met Life Inc. (NYSE:MET), down 6%.

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.

The long-term record of this series is so good I must attribute much of it to luck. The average return has been 37.9%, compared to 8.3% for the S&P 500 over the same periods. I hasten to say that my real-life results as an investment manager were not this strong.

The abnormally robust result owes much to outsized returns on columns I wrote in 2000 and 2002. Overall, 14 of the 15 columns have been profitable and 10 have beaten the S&P 500.

Disclosure: I own Valero for most of my clients and CVS Health for a couple.

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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