How many efficient-market theorists does it take to screw in a light bulb?
Punchline: None, because if the light bulb needed to be changed it would already have been done.
The efficient market theory states that -- since stock investors instantly incorporate all known information into stock prices -- your chances for a gain are the same on any one stock as on another.
Investment managers like me spend our lives trying to disprove the efficient market theory. In this column, I bring you a variety of paradigms that I hope will improve your chances of beating the market.
One paradigm is to buy stocks with high profitability and low debt.
This is the 15th column I’ve written on high-profit, low-debt stocks. The average one-year return on my first 14 sets of recommendations was 11.5%, compared to 8.4% for the Standard & Poor’s 500 Index.
Nine of the 14 columns were profitable, and nine of the 14 beat 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.
Today I have four new recommendations of stocks with high profitability (return on stockholders’ equity of 20% or more) and low debt (debt 10% of stockholders’ equity or less).
I’ll lead off with National Beverage Corp. (FIZZ, Financial). It trades for about $45 a share, after reaching more than $100 in parts of 2017 and 2018. The company flew high on the rapid growth of La Croix sparkling water, its best-selling and most profitable product.
Other products include Shasta and Fago sodas, Rip it energy drinks, and Everfresh and Mr. Pure juices.
This year, the stock plunged because of shareholder lawsuits alleging that the company’s “all natural” claims for La Croix were false. I don’t know how the suits will be resolved, but sparkling water is a fast-growing category, popular with millennials, and La Croix is one of the leading brands.
National Beverage is debt free. It achieved a return on equity of more than 43% in the past four quarters.
One risk: Some stores have pulled St. Croix from their shelves following the lawsuits. Another: Public shareholders aren’t in the driver’s seat. Insiders, notably the Caporella family, control about 75% of the stock. But at the present price, I like the risk-reward ratio.
Gentex Corp. (GNTX, Financial) is the leading maker of self-dimming mirrors for cars. (It also makes self-dimming windows for planes.) It posted a 22% return on equity in the past four quarters and is debt-free.
Gentex unsuccessfully tried to penetrate the market for rear-view cameras for cars. Perhaps for that reason, the stock has made no net progress since early last year. Yet its profit margins have been widening and its earnings increasing.
At the current valuation of 14 times earnings, I think Gentex is a good buy.
Want a really out-of-favor stock? Consider Cactus, Inc. Based in Houston, Texas, the company makes oil-drilling equipment, notably wellheads and pressure-control equipment.
Investors hate the energy industry at the moment. Oil inventories are high, and whenever they ease off a bit, producers are eager to drill. But there’s no commodity more necessary than energy.
With a return on equity close to 28%, Deckers Outdoor Corp. (DECK, Financial) looks appealing. Based in Goleta, California, Deckers makes shoes, boots and clothes. Among its brands are Teva, UGG, Hoka, Sanuk, and Koolaburra.
The company’s debt is only 3% of equity, and it enough cash to pay off all of its debt.
The drawback is that the stock has already moved up a lot. Normally, I’m not one to jump on bandwagons. But I think this one will roll on for a while.
A 62% gain in Electro Scientific Industries (ESIO, Financial) saved my bacon on my picks from a year ago. Novo Nordisk A/S also did well, up 16.6%. Ituran Location and Control Ltd. trailed the index slightly, with a 4.5% gain.
My average for the past year was 11.7%, versus 6.3% for the S&P 500.
Disclosure: I own Ituran Location and control personally and for some 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].
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