Ten Attractive Stocks to Buy at 10 Times Profits: John Dorfman
For many years, I published an annual list of 10 recommended stocks, each selling for 10 times earnings.
I called it the Perfect 10 Portfolio. Today I would like to revive that tradition.
Why do I put such stress on this particular measure? In practice, I use at least a dozen criteria in picking stocks, yet the price-earnings ratio -- which is a stock’s price divided by the past four quarters’ per-share earnings -- remains my single most important tool.
Used by professional investors for more than 70 years, the P/E ratio came into common use by individual investors 38 years ago. I remember because I was a business reporter for Associated Press at the time. The AP pioneered the dissemination of P/E ratios to the nation’s newspapers, which dutifully printed them for about three decades.
A few years ago, newspapers, short of revenue and trying to save on paper costs, began to phase out stock listings, which now are widely available on the Internet.
By the time that happened, investors had become accustomed to looking at the P/E. A ratio of about 15 is historically average. After Friday’s market drop, the 500 stocks in the Standard & Poor’s 500 Index sell for an average multiple of a bit higher than 15.
A lower multiple means a stock is cheaper than average, usually because of some widely-known problem.
Beating Expectations
It’s important to remember that stocks advance by exceeding expectations. Low expectations are easier to exceed than high ones, which is why unpopular stocks with low P/E ratios generally do better than popular ones.
Here are 10 bargains trading at 10 times earnings.
Northrop Grumman Corp., based in Los Angeles, is a U.S. defense contractor that makes planes, ships, drone aircraft and related military equipment. The company recently said it may sell its shipbuilding unit. With or without ships, I think the stock is attractive at a time when the U.S. faces hostility from Iran, North Korea and international terrorists, and has shaky friendships with Russia and China. Congress might cut the defense budget in 2011 and 2012, but I don’t think the cuts will be too deep.
Rapid Expansion
For a rich dividend play, consider CenturyLink Inc. of Monroe, Louisiana. At the moment it yields more than 8 percent in dividends. The telephone company, which changed its name from CenturyTel Inc., is acquiring Qwest Communications International Inc., doubling its subscriber base. Rapid expansion can be dangerous, and the company’s debt is 81 percent of equity. Still, on balance I like it.
Lubrizol Corp., with headquarters in Wickliffe, Ohio, is the world’s largest maker of additives for fuels, engine oil and other lubricants. The company reported first-quarter earnings of $2.32 a share, a record, on revenue of $1.3 billion. It earns high profit margins for a chemical company.
Nasdaq OMX Group Inc. is the parent company of stock and commodity trading networks in the U.S. and Europe, including the Nasdaq stock market, home for many U.S. technology companies. For years I avoided this stock because it was too pricey, and I even sold it short once or twice. But it has fallen more than 60 percent from its 2007 high of $50, and at about $18 today I see value in it.
Consistent Profits
Batting seventh in my lineup is Ingram Micro Inc., a wholesaler of information-technology products. Based in Santa Ana, California, the company operates with razor-thin profit margins. It sells for less than book value, even though it has been profitable in nine of the past 11 years.
Kinetic Concepts Inc., located in San Antonio, makes wound- care products and specialty hospital beds. I’ve owned the stock in the past, and might do so again now that it’s cheaper. It trades at about $36, down from about $53 in March.
Buckle Inc., located in Kearney, Nebraska, sells casual clothing in about 400 stores in the U.S. In its latest fiscal year it had revenue of $898 million and net income of $127 million, both record highs.
Lexington, Massachusetts-based Cubist Pharmaceuticals Inc. is a turnaround story. After sustaining losses each year from 1994 through 2006, it broke into the black in 2007. Last year its earned about $80 million on sales of $562 million. Its sole drug so far is the antibiotic Cubicin, and another antibiotic, CXA-201, is in the pipeline.
Spotlight on Solar
GT Solar International Inc., based in Merrimack, New Hampshire, produces a variety of equipment for the solar industry. It is a leader in making furnaces that melt silicon into a purer form to produce ingots from which solar wafers and ultimately solar cells are made. I’m not sure whether solar energy is a growth industry long-term, but it certainly is for as long as governments in the U.S., Germany, France and China are determined to promote it. The company is debt free.
I’ve long been interested in FPIC Insurance Group Inc., located in Jacksonville, Florida. The company provides medical liability insurance, is the largest issuer of that product in Florida, and is one of the larger issuers in Texas. This out-of- favor stock is selling just below book value even though it has been profitable in 10 of the past 11 years.
Disclosure note: I own shares of GT Solar and FPIC Insurance, personally and for clients. I have no long or short positions in the other stocks discussed in this week’s column.
(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.)
To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com.
To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net
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