John Dorfman: The rabbit roared in 2021

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The Bunny wallet jumps out again. It has bounced back to a 36.6% return in the past year.

I named this hypothetical wallet after the Energizer bunny of commercial fame in batteries, which “goes on” long after you’d expect it to lose power. The companies in the Bunny portfolio have done well in the past, but investors are skeptical about their future.

Putting this concept into numbers, a Bunny stock must have a market value of $ 250 million or more and show five-year average earnings growth of 25% or better, while selling 12 times earnings or less. These figures show that investors do not believe that the great growth of the past can be sustained.

When I created this portfolio two decades ago, I expressed the belief that people are poor predictors of the future, so many of these stocks will “last” longer than expected.

This is a portfolio of 10 stocks, selected each year in December by formula. Among the eligible stocks, the formula chooses the five with the fastest historical growth and the five with the lowest share price / earnings ratio.

The record

The Bunny portfolio you are about to read will be my 21st. The previous 20 posted an average one-year return of 14.5%, well above the 10.7% of the S&P 500 Total Return Index.

Thirteen of my 20 Bunny collections have been profitable, but only nine have beaten the index.

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.

The 36.6% return from last year came largely from earnings at MVB Financial Corp. (MWBF, up 100%) and Tronox Holdings PLC (TROX, up 81%). The worst performers were MSG Networks Inc. (now Madison Square Garden Sports, MSGS, down 5%) and Equity Commonwealth (EQC, down 4%).

The S&P 500 Total Return Index rose 31.02%, so the Rabbit beat it by five points.

New choices

Here are the ten actions that the Bunny paradigm chooses now.

B. Riley Financial Inc. (RILY) is a Los Angeles-based finance company. She takes care of investment banking, auctions and liquidations, and valuations. He also owns a stake in United Online and magicJack.

Bio-Rad Laboratories inc. (BIO) is back for a second year, after posting a 28% gain last year. I like medical testing companies like this because I think we’ve entered a world where more people will be tested for more things (not just covid-19) most of the time.

Business First Bancshares Inc. (BFST), headquartered in Baton Rouge, Louisiana, focuses on lending to small and medium-sized businesses and also deals with personal banking services. For a small bank, it has a large portfolio of securities, worth around $ 1 billion.

Commercial Metals Company. (CMC), based in Irving, Texas, is a steel producer and metals recycler in the United States, Poland and China. It is a large manufacturer of rebar and other steel products used in non-residential construction. I think it should benefit from the recently passed infrastructure bill.

CTO Real Estate Growth Inc. (CTO), based in Daytona Beach, Florida, is a real estate investment trust that primarily owns commercial properties in the South. Investors think working from home is the new normal, so this stock is very cheap, selling for below book value (company equity per share).

Enova International inc. (ENVA) is a Chicago-based consumer finance company that does business through the Internet. It mainly lends to unprivileged consumers and small businesses, which it says are “often underserved by traditional banks.”

Gray Television Inc. (GTN), based in Atlanta, has offered investors a return of 1,176% over the past decade, well above the 358% of Standard & Poor’s Total Return Index 500. Investors are skeptical as internet advertising monopolizes ad revenue growth. Nonetheless, Gray managed to increase his income by 17% last year and 15% in the last decade. I love that Gray has TV channels in 94 markets and is # 1 out of 70 of them.

North-East shore (NBN) is a banking company in Portland, Maine. He made numerous loans under the Paycheck Protection Program and charged a high fee for doing so.

PennyMac Financial Services (PFSI) is another repeat; it increased by 17% last year. He handles mortgage services for Fannie Mae and Freddie Mac. They are government sponsored companies; PennyMac is not.

SmartFinancial inc. (SMBK) is a bank holding company in Knoxville, Tenn. Although income has grown rapidly, I would say it has gone from meager to respectable. I think interest rates will rise over the next couple of years, helping SmartFinancial and most of the banks and lenders on this list.

Disclosure: I do not own the shares discussed today personally or for clients.

John Dorfman is president of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His company or clients may own or trade securities mentioned in this column. He can be contacted by email.


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