Five Stocks Top the Rest in My Elite 30-30 Club: John Dorfman

April 11 (Bloomberg) - What do Apple Inc. (AAPL) and baseball Hall-of-Fame star Willie Mays have in common?

They are both members of an elite group known as the 30-30 Club. In baseball, the club is for ballplayers who belt 30 home runs and steal 30 bases in the same season.

This combination of strength and speed is rare. In more than a century of major league baseball, only a few dozen players have achieved it. Bobby Bonds and his son Barry Bonds each did it five times. Mays managed to do it twice.

My 30-30 club is for businesses. To make the cut, a company needs a rare combination of profitability and growth. It must achieve a 30 percent return on stockholders’ equity in its latest fiscal year, and show 30 percent average annual earnings growth over the past five years. (I calculate earnings growth as a simple average of percentage changes in the past 5 years.) Only U.S. companies with a market value of $2 billion or more are eligible.

Twenty-two companies made the roster this year compared with 18 in 2010. The two best known members are Apple and Coca- Cola Co. Apple, the Cupertino, California, colossus, has gone from strength to strength, as consumers clamor for its iPad, iPhone and iPod, among other products.

Would I buy Apple shares today? Lord, forgive me, I would not. Stocks advance by exceeding expectations. Apple, selling for almost six times book value (corporate net worth) and four times revenue, embodies high expectations, which are difficult to exceed.

Apple, Coca-Cola

Yes, Apple’s stock price advanced 147 percent in 2009 and another 53 percent in 2010. I simply don’t believe it will have such dramatic gains this year or next.

Coca-Cola is traditionally a standard holding for growth investors. In the 10 years through March, its stock has gained 47 percent in price. That’s better than the 14 percent price gain for the Standard & Poor’s 500 Index, but less than the Atlanta-based company’s fans no doubt expect.

I respect Coca-Cola as a company. Yet at five times book value and four times sales, it has valuations similar to Apple’s, and it lacks Apple’s gaudy growth.

While I can’t get excited about the marquee names in this year’s 30-30 club, I do like five lesser-known stocks in the group.

Alliance Resource Partners LP (ARLP) is a coal producer based in Tulsa, Oklahoma. It’s been profitable every year since at least 1997, which is as far back as my Bloomberg database goes.

Alliance stock sells for 12 times earnings, which is less than the multiple for most coal companies. Renewed concerns about nuclear power and offshore oil drilling make coal stocks timely. One drawback: Debt is higher than I like, at 159 percent of equity.

More I Like

You’ll find a stronger balance sheet at NewMarket Corp. (NEU) The Richmond, Virginia, company makes chemicals that go into fuels and lubricants. I like NewMarket at 13 times earnings, with debt about 45 percent of equity.

Also appealing is Credit Acceptance Corp. (CACC), which provides financing for automobile dealers. Indirectly, it also provides financing to car buyers with shaky credit.

The Southfield, Michigan-based lender has an 11-year streak of profits. Its diluted earnings grew right through the recession of 2007 to 2009, and hit a record of $5.67 a share in 2010. This year analysts project another record, $6.71. Considering all that, the stock price of about $77, or 14 times earnings, looks reasonable.

No Debt

I continue to like Dallas-based Texas Instruments Inc. (TXN), a semiconductor maker I recommended in January. It is debt free, and had a return on equity last year of 32 percent.

Finally, I recommend Cliffs Natural Resources Inc. (CLF), an international iron ore producer based in Cleveland. In addition to benefiting from an economic recovery in the U.S., I figure Cliffs will continue to export heavily to Asia, especially China. In 2010 it sold $1.3 billion of its commodities to China and $311 million to Japan, which faces extensive rebuilding needs.

Now, for a word of follow-up. A year ago, I rated three of the 30-30 club members “especially attractive.” Here’s an update on them.

New York-based Aeropostale Inc. (ARO), a clothing retailer targeting young people, has fallen 16 percent since I recommended it 12 months ago. I still consider it a bargain, now selling at 10 times earnings and less than one times revenue.

Still Looks Good

Diamond Offshore Drilling Inc. (DO), based in Houston, saw earnings fall as oil from the Deepwater Horizon spill fouled the Gulf of Mexico. Its share price has fallen 13 percent. At 12 times earnings, it still looks good to me.

Shares in Milwaukee-based Joy Global Inc. (JOYG), a maker of mining equipment, have risen 63 percent in the past year. Today the stock fetches 21 times earnings and seven times book value (corporate net worth per share). I think it is fully valued, and wouldn’t chase it.

Disclosure note: I own shares in Cliffs Natural Resources personally and for clients. I have no long or short positions in the other stocks discussed in this week’s column.

Here are this year’s members in my 30-30 club, listed alphabetically. Those marked with an asterisk were also in the club last year.

Alliance Resource Partners LP

Altera Corp. (ALTR)

Apple Inc.*

Cliffs Natural Resources Inc.

Coca-Cola Co. (KO)

Compass Minerals International Inc. (CMP)*

Credit Acceptance Corp.

Deere & Co. (DE)

DST Systems Inc. (DST)

Eaton Vance Corp. (EV)*

Express Scripts Inc. (ESRX)

FMC Technologies Inc. (FTI)*

Gartner Inc. (IT)

ITT Educational Services Inc. (ESI)

Limited Brands Inc.

NewMarket Corp.

Nordson Corp. (NDSN)

Priceline.com Inc. (PCLN)*

Rockwell Automation Inc. (ROK)

Tempur-Pedic International Inc. (TPX)*

Texas Instruments Inc.

Walter Energy Inc. (WLT)

(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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