John Dorfman: Robots Portfolio: Extreme Value
Investors are well aware that growth stocks have beaten value stocks five years in a row. So what am I going to recommend today? Some stocks of extreme value.
Since 1998, I started the year with the Robot Portfolio, made up of the ten cheapest stocks on the market. My measure of cheapness is the price / earnings ratio (the stock price divided by the company’s earnings per share over the past four quarters), or P / E for short.
These are high risk stocks. Businesses have obvious problems; otherwise their stocks would not be so cheap. But that leaves plenty of room for positive surprises.
To be eligible for inclusion in the Robot portfolio, a stock must have a market value of at least $ 500 million, positive earnings, and not too much debt (less than equity).
Over the past 23 years, the Robot has achieved a cumulative return of 1,203%, eclipsing the 578% return of the Standard & Poor’s 500 Index. However, it has seen a string of losses in recent years when growth beat the value.
Last year was the fourth year in a row that it failed to beat the index. The Robot generated a respectable return of 17.2%, but the S&P 500 achieved a return of 28.7%.
Keep in mind that the results for my columns are hypothetical and should not be confused with the results I get for clients. In addition, past performance does not predict the future.
It might be New Years optimism, but I feel the market pendulum is starting to tip value. I predict the Robot Portfolio will outperform the index in 2022.
The robot’s new choices
And now let me introduce you to the new cheapies in early 2022.
Shenandoah Telecommunications Co. (SHEN), a broadband provider based in Edinburg, Va., is considered the cheapest stock, priced below twice recent earnings. Analysts expect earnings to dip this year, but three of the four that cover the stock are still appreciating it.
Agios Pharmaceuticals Inc. (AGIO) also recovers less than twice the winnings. Based in Cambridge, Mass., It is a biotechnology company that worked in cancer and rare genetic diseases. He sold his anti-cancer operations about a year ago for $ 1.8 billion, so he’s redefining himself.
Genworth Financial Inc. (GNW) is a holdover from what was once General Electric’s financial empire. It sells mortgage insurance, life insurance and annuities. Profits in recent years have been sporadic and unimpressive, but have improved in recent times. The P / E is two.
What would 19th-century mogul Andrew Carnegie say if he knew that United States Steel Corp. (X), which he founded, was no more than a simple medium-sized action? He has suffered losses in nine of the past 15 years. But lately, with tariff protection and strong demand for steel, it has been racking up profits. The P / E is two.
Another familiar name is Smith & Wesson Brands Inc. (SWBI), a rifle and firearms manufacturer based in Springfield, Massachusetts. This company had a great year last year and the stock is selling for three times its earnings. Investors may fear strict gun control laws. I favor them but I think they are unlikely.
Sage Therapeutics Inc. (SAGE), a Cambridge, Massachusetts-based biotechnology company is also trading at three times its earnings. It targets brain disorders, including depression. The stock has dropped 50% in the past year as a depression drug he was working on along with Biogen TK failed in clinical trials.
Enova International Inc. (ENVA) is a Chicago-based online consumer loan company. Profits have risen 57% in the past five years, but the stock is only selling three times earnings. It’s also one of ten stocks in my annual Bunny portfolio.
Bio-Rad Laboratories inc. (ORGANIC), a medical testing company, is based in Hercules, California. The stock sells barely three times earnings as investors fear earnings will drop sharply once the covid tests are completed. I feel like we now live in a world that will require more testing, covid or not.
Weigh less than four times the gains is Ironwood Pharmaceuticals Inc. (IRWD) from Boston. Its main product (Linzess) treats irritable bowel syndrome with constipation. Over the past ten years, the stock has sold for 15 times earnings, on average, so the current price may be a steal.
Completing my list of ten Robot actions is eBay Inc. (EBAY), an online marketplace for new and used products, at less than four times revenue. Investors believe there will be less reason to shop on eBay once consumers return to physical stores.
Based on past experience, some of these stocks will decline in the coming year. But there’s a good chance a few will erupt enough to make speculation worth it.