Old-Fashioned Value Portfolio With a Twist
If you’re looking for value-oriented ideas in a market like this, a Boston money manager has some ideas.
John Dorfman, whose “robot portfolio” of out-of-favor stocks gained 40% in 1999--twice the increase of the Standard & Poor’s 500 index--has come up with a new version for 2000.
The robot portfolio uses an old-fashioned value approach--the kind that many investors turn up their noses at these days. It is based on a computer screen that simply chooses the stocks with the lowest trailing price-to-earnings ratios, first weeding out those with market values below $500 million and those whose debt is larger than stockholders’ equity.
Studies have shown that, as a whole, the lowest P/E stocks outperform the highest P/E stocks in the next year. But faced with a barrage of unfavorable analytical opinions and negative headlines, it’s hard for any money manager--or average investor, for that matter--to grit his or her teeth and buy the least popular issues, even if their P/Es are well under the market average of about 28.
That may be why the emotionless “robot” portfolio outperformed active “value” fund managers last year (they only gained 9% as a group, according to Morningstar Inc., the Chicago-based fund tracker).
Of course, a very low trailing P/E on a stock can indicate that investors have little faith in earnings growth going forward--or that investors expect an outright decline in earnings in the immediate future. Still, the greater the pessimism about a company, the more potential there may be for a pleasant surprise.
Here are Dorfman’s “robot” stocks for 2000:
* Warnaco Group Inc. (ticker symbol: WAC), the maker of Calvin Klein jeans, Speedo swimsuits and other clothing. Its P/E through last year’s third quarter, the latest earnings reported, is only 3.4. And even on the company’s recently lowered expectations of $1.90 a share for full-year 1999, the stock’s P/E would be just 6.
In the mid-’90s, Chief Executive Linda Wachner was considered a first-rate leader and Warnaco stock rose from about $15 in 1994 to more than $42 in mid-1998. But it has lost its cachet and sells for less than $12.
* IBP Inc. (IBP), the nation’s largest beef packer, which goes for 5.2 times earnings. It sells for about book value (corporate net worth per share).
* First American Financial Corp. (FAF), a title insurance company whose stock has plunged from about $35 a year ago to about $12 today. The P/E is 5.5.
* McDermott International (MDR), which has four major lines of business: building offshore oil-drilling platforms, making power generators, supplying nuclear fuel and reactor parts to U.S. Navy submarines and doing engineering and construction. Its P/E is 5.4.
* USEC Inc. (USU), a uranium enrichment company with a P/E of 5.5. The demand for electricity could rise faster than expected, and nuclear power could play an important role in meeting that demand, Dorfman said.
* HealthSouth Corp. (HRC), with a P/E of 5.5, specializes in outpatient surgery and rehabilitation centers.
* Lennar Corp. (LEN), a home-building company with a P/E of 5.6. Lennar stock has sagged to about $16 from $34 in early 1998. Fear of rising interest rates is the main culprit.
* American National Can Group (CAN), whose P/E is 6.3. “I don’t much care for the stock, but hey, this is the robot’s portfolio, not mine,” Dorfman said. “Who am I to quibble?”
* Alaska Air Group (ALK), which has a P/E of 6.4, is one Dorfman especially likes. It is held in several of his clients’ accounts.
* Precision Castparts Corp. (PCP), which also has a P/E of 6.4. The company makes castings used in jet aircraft engines, gas turbines and other applications.
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Deep ‘Value’
To select a “Robot Portfolio” of cheap stocks for 2000, money manager John Dorfman screenedBloomberg’s database for those with the lowest trailing price-to-earnings ratios as of Dec. 31. P/E ratios shown here are updated as of Thursday’s close.
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Trailing Est. annual Ticker Thurs. price-earnings 3-5-yr. EPS Company symbol close ratio % growth Warnaco WAC $11.25 3.4 14.5% IBP IBP 17.75 5.2 7.2 First American Fin. FAF 11.88 5.2 11.3 McDermott Intl. MDR 9.06 5.4 15.0 USEC USU 7.06 5.5 4.3 HealthSouth HRC 5.31 5.5 15.2 Lennar LEN 15.88 5.6 13.5 American Natl. Can CAN 13.00 6.3 10.3 Alaska Air Group ALK 34.78 6.4 9.4 Precision Castparts PCP 26.00 6.4 13.8
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Sources: Times research, Bloomberg News
