Does anyone call a beautiful woman a perfect 10 anymore?
Probably not, but my Perfect 10 Portfolio lives on.
It’s an annual list of 10 stocks, each of which sells for 10 times earnings — no more, no less.
These are cheap stocks. The average price/earnings multiple these days is about 24, and the long-term average is somewhere around 15.
Cheap doesn’t mean bad. Companies for which investors have low expectations have an opportunity to produce pleasant surprises. Out-of-favor stocks don’t need much good news to nudge them upward.
Here are the stocks that grace my 24th annual Perfect 10 Portfolio.
Food Chain
Three of my new selections center on the U.S. food chain.
A major producer of nitrogen for fertilizer, CF Industries Holdings Inc. (CF) is based in Northbrook, Ill. Nitrogen usually is produced from natural gas, and natural-gas prices have been pleasantly low in recent years. The worldwide fertilizer shortage caused by the Iran war has increased CF’s profits.
Known until 2012 as Corn Products International, Ingredion Inc. (INGR) of Westchester, Ill., provides ingredients to the food, beverage and animal-feed industries. The stock was smashed in the past 12 months (down 27%), and most analysts have given up on it. In my view, the recent decline was overdone.
A leading producer of hogs and pork products, Smithfield Foods Inc. (SFD) has a skimpy following on Wall Street. Only six analysts follow it; five of them recommend it. The stock has been a poor performer, but I think it will pep up. The dividend yield is attractive, north of 4%.
Financials
Several banks had the requisite price/earnings ratio of 10. Farmers & Merchants Bancorp. (FMCB), based in Lodi, Calif., has very little debt and nice profitability. I like to see banks earn 1% or more on assets. This bank has done it in 14 of the past 15 years (and just missed in 2017).
Another bank I like is West Coast Community Bancorp (WCCB), based in Santa Cruz, Calif. It’s a small company that does a lot of small-business and agricultural lending.
Over the past 10 years, shares of Hartford Insurance Group Inc. (HIG) have quietly tripled. Two investment managers I respect, Jeremy Grantham and Joel Greenblatt, added to their holdings of Hartford in the first quarter. Profitability is strong, with a 22% return on equity recently.
This and that
My other four selections are in a polyglot of various industries.
Amdocs Ltd. (DOX), with headquarters in Saint Louis, provides software and services to communications, media and financial companies. Among its big customers are T-Mobile, AT&T, and Vodafone. Sales barely budged in the past four quarters, but earnings were up more than 11%.
Buckle Inc. (BKE), which hails from Kearney, Neb., makes casual clothes, footwear and accessories. In the past five years, it has grown its earnings more than 13% a year. Investors know the fashion industry is fickle, and they worry because Buckle relies mainly on mall stores (not e-commerce).
Small appliances are the specialty at Hamilton Beach Brands Holdings Co. (HBB) of Glen Allen, Va. There’s no visible sales or earnings growth here; it’s a mature business. Nonetheless, the company has managed to crank out a profit in nine of the past 10 years.
Speculative but interesting is Vox Royalty Corp. (VOXR) of Westminster, Colo. It acquires partial interests in mines. Traditionally it concentrated on gold, but lately it is getting more involved in copper. Vox likes to take stakes in mines that are three to five years away from production.
Performance
I’ve compiled 23 Perfect 10 Portfolios over the years, and the average one-year return has been 18.4%. That compares well with the Standard & Poor’s 500 Total Return Index, at 11.5%%.
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.
My Perfect 10 Portfolio from a year ago returned 22.9%, just edging out the S&P 500 Total Return at 22.3%.
My choices in this series have been profitable 19 times out of 23, and beaten the index 13 times.
The best performers from last year’s batch were Halliburton Co. (HAL), up 59.8% and Bunge Global SA (BG), up 56.8%. The worst were Molson Coors Beverage Co. (TAP), down 17.4%, and Academy Sports and Outdoors Inc. (ASO), down 8.4%.
One member of last year’s Perfect 10 was acquired. HNI Corp. purchased Steelcase Inc., at a gain of 52.7%.
Disclosure: Some of my firm’s clients own Halliburton and Ingredion.