To call a beautiful woman a “Perfect 10” these days would be considered chauvinistic and outdated. But my Perfect 10 Portfolio is still looking good. This is a hypothetical portfolio of stocks, each of which sells for 10 times the company’s earnings per share. Historically, most stocks sell for about 15 times earnings, so a multiple of 10 is a bargain.
In today’s hot market it’s even more of a bargain, since the average stock now fetches about 33 times earnings. Popular stocks have high price/earnings ratios, and unpopular stocks have low ones. I’ve always believed that unpopular stocks are the best road to stock-market gains, even though that belief has been severely tested in the past three years or so.
Beginning in 2000, I’ve compiled the Perfect 10 Portfolio 18 times (today’s is the 19th). The average one-year return has been 21.9%, which looks very good compared to the Standard & Poor’s 500 Index at 10.9%.
Last’s year’s Perfect 10 choices returned 69.3%, versus 38.8% for the index. Buckle (BKE) led the way with a 206% gain. Raymond James Financial (RJF) contributed a 92% return, and Mohawk Industries (MHK) chipped in 88%. The worst performer was Farmers & Merchants Bancorp (FMAO), up less than 8%.
My column results are hypothetical: They don’t reflect actual trades, trading costs or taxes. They shouldn’t confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future results. Fifteen of the 18 Perfect 10 columns have been profitable, while 12 have beaten the index.
Here the new Perfect 10 Portfolio — ten stocks you can buy for about 10 times earnings each.
Amalgamated Financial (AMAL), is a small bank that concentrates on big markets – New York, Boston, San Francisco and Washington. It has greatly reduced its debt in the past three years, to the point that debt is now only 10% of stockholders’ equity.
America’s Car-Mart (CRMT) sells used cars to people with shaky credit, mainly in the South. It knows how to price car loans to take into account the risk of non-payment. The used-car market happens to be hot right now, but I like this company long-term; it even made money in the 2008 recession.
Cigna, the big health insurer, seems like a solid bet to me. Radical overhaul of the nation’s health-care and insurance systems, an issue in the last Presidential election, has receded to the periphery. The company has shown a profit 29 years out the past 30.
D.R. Horton (DHI) is the nation’s largest homebuilder. I like the whole industry, but I consider Horton financially stronger than most of its competitors, with debt only 35% of stockholders’ equity. I also like it that Horton serves several different price points.
Federated Hermes (FHI) is one of the largest providers of money-market funds, and a major seller of stock and bond funds. You’ll find its offerings in many corporate pension and profit-sharing plans. It has consistently shown above-average profitability.
Hologic (HOLX) makes products for women’s health (especially breast cancer screening) and also engages in medical testing, including for Covid-19. With the pandemic waning, shares are down about 5% this year. Over the past ten years, the stock commanded a price/earnings ratio averaging 33, so the present multiple of 10 seems to me a bargain.
Laboratory Corp. of America Holdings (LH) seems timely to me. The Covid-19 epidemic is moving from a crisis to a problem, at least in this country. But I believe the future will involve more frequent medical tests for a variety of medical conditions.
Lumber Liquidators Holdings (LL) sells flooring, especially hardwood flooring. This is a turnaround story. The company had four money-losing years, and was fined $33 million for misleading investors about Chinese flooring that contained formaldehyde. There are flaws, but I think the stock is cheap.
Turtle Beach (HEAR) sells headphones and headsets for gamers, including virtual-reality sets. The company’s products really took off during the pandemic, which is now waning. But I think it can hold onto much of the business it gained, and perhaps more.
Zumiez (ZUMZ) is a clothing company for young people who skate or skateboard, or want to look like they do. It sells its clothing both in stores and online. Sales have grown at a 10%-a-year clip for the past ten years, and faster lately.
Disclosure: I own America’s Car-Mart and D.R. Horton personally and for most of my clients. I own Turtle Beach personally and in a hedge fund I manage.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, 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].