FYI - Commentary by John Dorfman:
Here Are My 10 `Robot Portfolio' Stocks for 2005: John Dorfman
2005-01-04 00:06 (New York)
(Commentary. John Dorfman, president of Dorfman Investments
in Newton Centre, Massachusetts, is a Bloomberg News columnist.
The opinions expressed are his own. His firm or its clients may
own or trade investments discussed in this column.)
By John Dorfman
Jan. 4 (Bloomberg) -- For the sixth consecutive year, my
``Robot Portfolio'' has beaten the Standard & Poor's 500 Index
and the vast majority of money managers.
The Robot scooted to a 38 percent return in 2004, while the
S&P 500 was up 11 percent. Both figures include dividends and
ignore commissions and taxes.
Over six years, the Robot Portfolio has produced a
cumulative return of 540 percent on a series of one-year buy-and-
holds. The S&P 500 is up 7.5 percent.
Last year's success was spurred by a 143 percent gain in USG
Corp. (USG), a 50 percent gain in Beazer Homes USA Inc. (BZH),
and a 48 percent gain in InVision Technologies Inc. (INVN), which
General Electric Co. (GE) acquired in December.
Nine of the 10 Robot stocks rose. The sole loser, AT&T Corp.
(T), returned negative 0.6 percent.
What is this Robot? It is nothing but a naive stock-picking
model designed to make a point. I launched it in January 1999 to
illustrate the desirability of stocks with a low price compared
with per-share earnings.
I use it as a source of ideas for actual client portfolios.
And a few people have invested directly in it. This is a small
group of stocks and not diversified, so any such investment
should be done with caution.
Louisiana-Pacific
Here is how the Robot works. Using Bloomberg stock screening
software, it identifies U.S. common stocks with a market value of
$500 million or more. It eliminates those with negative earnings
for the past four quarters, or debt greater than stockholders'
equity.
The final step is simplicity itself: Stocks are ranked by
price-earnings ratio and the Robot selects the 10 with the lowest
P-E.
Of course, every stock in the Robot Portfolio has something
wrong with it; otherwise investors would accord it a higher P-E.
Yet investors often overreact to temporary troubles.
Now it's time for the Robot to crank out its new picks.
The lowest P-E, 5, as of Dec. 31, belongs to Louisiana-
Pacific Corp. (LPX) of Nashville, Tennessee. The company makes
building materials and industrial wood products.
I think Louisiana-Pacific is cheap because investors figure
that rising interest rates will cripple construction in 2005.
It's a reasonable fear but, in my opinion, overdone.
USG, Tesoro, Intergraph
USG, a Chicago company that makes wallboard and other
construction materials, is on the Robot list for a second year in
a row. It sports a P-E of 6.
USG is cheap for the same reason as Louisiana-Pacific, plus
asbestos litigation fears. It is operating in Chapter 11 even
though it has almost no debt, as a protection against thousands
of asbestos-related lawsuits. I think Congress will provide some
aid on this front, and I own USG for most clients.
Tesoro Corp. (TSO), out of San Antonio, is a refiner. The
stock seems attractive at 6 times earnings, 1.6 times book value
(corporate net worth per share) and 0.19 times revenue.
Intergraph Corp. (INGR) of Huntsville, Alabama, sells
software used for design, mapping and modeling. The P-E is 7. I
own it for some clients, but you should be aware that the company
posted losses each year from 1993 through 1999.
Metal Management, LandAmerica Financial Group
Metal Management Inc. (MTLM), based in Chicago, is a scrap
metal recycler selling for 7 times earnings. Clearly its fate is
tied to the strength of the economy. I figure the economy will
slow some in 2005, but it starts from a robust point.
Sixth-cheapest is LandAmerica Financial Group Inc. (LFG), a
Richmond, Virginia, title insurer that has been in the Robot
Portfolio each of the past two years. It returned 51 percent in
2003 and 4.3 percent last year. Again, fear of the Fed is the
main reason the stock is so cheap (7 times earnings). If rising
rates hurt housing sales, there will be less need for title
insurance.
In the seventh spot is General Maritime Inc. (GMR), a New
York firm that operates a fleet of oil tankers. I own it for some
clients and consider it a good three- to- five-year investment at
7 times earnings.
Maverick Tube, Commercial Metals
Eighth is Maverick Tube Corp. (MVK), at 8 times earnings.
Based in Chesterfield, Missouri, Maverick makes tubing used by
oil drillers and pipelines. Its fortunes are tied to those of the
oil and gas industry. In my opinion, those are unclear for the
next year but look rosy for the three- to five-year pull.
Ninth comes Commercial Metals Co. (CMC), whose headquarters
are in Irving, Texas. It makes, recycles and markets steel and
other alloys and trades metals, ores, concentrates, industrial
minerals and chemicals. The stock sells for 8 times earnings and
0.27 times revenue. The company has been profitable for at least
18 years running.
Rounding out the list is American Axle & Manufacturing
Holdings Inc. (AXL) of Detroit, which makes transmission parts
for light trucks and sports utility vehicles. The stock sells for
8 times earnings.
American Axle is cheap for at least three reasons. Investors
fear the effect of rising rates on car sales. Earnings in the
third quarter were disappointing. And it is highly dependent on
General Motors Corp. Those valid concerns aside, I think American
Axle is cheap enough to be worth owning, and I have purchased it
for some clients.
I don't expect the Robot to continue its unbroken streak of
king-sized gains. Yet I believe it can outperform the market most
years, and I think it has a good shot at seven in a row in 2005.
--Editors: Ahearn, West.
Story Illustration: For a price graph on Louisiana-Pacific,
USG and Tesoro, type {HMS <GO>} and enter LPX US <Equity>,
USG US <Equity> and TSO US <Equity> in the first three numbered
spaces and press the Go key again.
To contact the writer of this column:
John Dorfman in Newton Centre, Massachusetts, at
(1)(617) 630-8000 or jdorfman@bloomberg.net.
To contact the editor responsible for this column:
Bill Ahearn at (1)(212) 893-4197 or bahearn@bloomberg.net |
