Three Stocks Take Top Honors in Elite 30-30 Club: John Dorfman
In more than a century of Major League Baseball, only 34 players have performed at a level high enough to enter the 30-30 Club, according to the Baseball Almanac.
I have my own 30-30 Club, for companies. To make it, a company needs to post a 30 percent return on equity (a measure of profitability) for its latest fiscal year and show 30 percent compound annual growth in earnings for the past five years. Only companies with $2 billion or more in market value are eligible.
Making the list is a distinct honor. Of the 1,031 companies with a market value of $2 billion or more, only 18 qualify. This year the group includes top-tier organizations such as Apple Inc. and McDonalds Corp.
These companies deserve to be celebrated for their achievement. That doesn’t necessarily mean that I would buy their stocks. Because many investors are already familiar with their merits, several of them sell for 22 to 42 times earnings, which is too much of a premium for my cheapskate taste.
Diamond Offshore, based in Houston, an oil and gas drilling company, is 50.4 percent owned by the Tisch family holding company, Loews Corp. At the moment it is the cheapest stock in this bunch, selling for nine times earnings.
New York City-based Aeropostale sells clothes to people who are younger and thinner than I. Racking up high profit margins in the fickle clothing business is difficult, and Aeropostale has managed it -- witness its 58 percent return on stockholders’ equity in the last fiscal year. What’s more, the company is debt-free. The stock goes for 13 times earnings.
Joy Global, located in Milwaukee, makes mining equipment for surface and underground operations and enjoyed a return on equity last year of more than 68 percent. It is a wonderful illustration of the profitability that can be found in unglamorous industries. In February, Joy announced that it will seek acquisitions in China. Chief Executive Michael Sutherlin said the deals will be limited to $100 million or less, so that they won’t require Chinese government approval.
I recommended both Diamond Offshore and Joy Global in this column on Dec. 14, 2009.
For Growth Crowd
There are another seven companies in this club that sell for 15 to 19 times earnings. They may appeal to those who belong to the growth-at-a-reasonable-price school of investing.
They are Consol Energy Inc. (16 times earnings), Baxter International Inc. (15), TJX Cos. (16), Compass Minerals International Inc. (16), McDonald’s (17), Alliance Data Systems Corp. (17) and BMC Software Inc. (19).
Two more stocks seem to me to merit a serious look from growth investors, those who emphasize rising earnings and are willing to pay up to own shares in a good-quality company. They are Nordstrom Inc. and the redoubtable Apple.
Seattle-based Nordstrom is a department store chain with a reputation for quality merchandise at higher than average price points. It mitigated the impact of the recession by increasing its supplies of moderately priced goods. I imagine it will try to go more upscale in the next couple of years.
Apple’s Hit Parade
Apple has been a juggernaut. Its earnings grew 73 percent in 2007, and another 73 percent in the recession-scarred year of 2008. Last year it tacked on another 34 percent.
In October I commented that I thought Apple will be only an average stock-market performer in the next two years because such high expectations are built into the stock. I still lean that way, but the stock now sells for 24 times earnings, as opposed to 32 when I wrote the column.
Apple’s stock has climbed to about $242 recently from about $72 at the end of 2005. If it can keep the parade of hit products coming, perhaps the stock will keep soaring, and my October prediction will be wrong.
I recommend avoiding the final six stocks on the list, which seem to me a bit pricey even considering their noteworthy achievements. They are FMC Technologies Inc. (23 times earnings), Packaging Corp. of America (26), Tempur-Pedic International Inc. (27), Eaton Vance Corp. (28), Priceline.com Inc. (37) and Netflix Inc. (42).
I would consider selling Netflix short, in effect betting on a decline. So far, the movie provider has proved adaptable. But there are so many ways people can get movies nowadays --many legal, some not -- that I think it will be hard for this online movie rental service to sustain or expand its profit margins.
I am leery of Eaton Vance because its strong suit is selling bond mutual funds. I believe that bonds, which did very well for the past decade and a half, will probably not be such good investments for the next decade or so. Rising interest rates are bad for bonds’ resale value. I fear that rates will rise as the federal government issues boatloads of bonds to finance battleship-sized deficits.
Disclosure note: I have no positions, long or short, in the stocks discussed in this week’s column.
Below is the list of all members of the 30-30 club, listed in order of market value, as of April 7, 2010.
Apple Inc. McDonalds Corp. Baxter International Inc. TJX Cos. Diamond Offshore Drilling Inc. Priceline.com Inc. Consol Energy Inc. Nordstrom Inc. FMC Technologies Inc. BMC Software Inc. Joy Global Inc. Netflix Inc. Eaton Vance Corp. Alliance Data Systems Corp. Aeropostale Inc. Compass Minerals International Inc. Packaging Corp. of America Tempur-Pedic International Inc.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
Click on “Send Comment” in the sidebar display to send a letter to the editor.
To contact the writer of this column: John Dorfman at firstname.lastname@example.org
Bloomberg moderates all comments. Comments that are abusive or off-topic will not be posted to the site. Excessively long comments may be moderated as well. Bloomberg cannot facilitate requests to remove comments or explain individual moderation decisions.