Old Faithful Erupts – With Five Stock Picks

April 22, 2024 (Maple Hill Syndicate) – You can count on it. Every 35 to 120 minutes, Old Faithful Geyser will erupt in Yellowstone National Park.

I’ve named one of my favorite stock screens after this famous geyser. It’s a simple multi-factor screen, pointing to stocks that:

· Boast a 15% return on stockholders’ equity (profits as a percentage of corporate net worth) or better.

· Have debt less than stockholders’ equity.

· Sell for 15 times earnings or less.

· Sell for two times book value or less.

· Have grown earnings at a 10% annual clip for the past five years.

I feature a few stocks from Old Faithful once a year in this column. Here are my five for the coming year.

Lennar
LEN

Many investors are terrified of homebuilding stocks. Houses are expensive and mortgage rates are high. So how, skeptics ask, can anyone afford a newly built home?

I think the skeptics will prove wrong, because I believe there is a lot of pent-up demand for single-family homes. I expect sales to surge if and when mortgage rates come down a peg or two. I like many of the homebuilders, including Lennar Corp., one of the largest ones.

Lennar is based in Miami, Florida, and sells homes in 26 states. It concentrates on medium priced-homes; its average selling price is a little over $400,000. Its shares trade at less than 11 times earnings, which I consider cheap. Its five-year earnings growth rate is above 28%.

Agco

Based in Duluth, Georgia, Agco Corp.
AGCO
makes tractors under give brand names, notably Massey Feguson. It also manufactures other agricultural equipment, such as grain handling machines, and sells a wide variety of farming supplies through 3,100 dealers worldwide.

Agco’s latest two fiscal years were the company’s best since 2011. Analysts expect the next two years to be moderat4ely less profitable. As a result the stock sells for less than eight times recent earnings, in contrast to an average valuation of just over 15 times earnings in the past decade.

I think the stock is a bargain now.

Hibbett

A smaller stock I like is Hibbett Inc. (HIBB) which runs the Hibbett chain of sporting goods stores – some 1,158 stores in 36 states. The stock went public in 1996 and the company has shown a profit every year since, even though there have been three recessions during that time.

Hibbett’s return on equity has exceeded 20% in eight of the past 12 years. I consider 15% good and 20% excellent.

Analysts expect Hibbett’s profits to be fairly flat for the next three years. Hence, the stock sells for less than nine times earnings.

I had also selected Hibbett a year ago, and since then it returned 26%, including dividends.

Farmers & Merchants

A nearly debt-free choice is Farmers & Merchants Bancorp (FMCB), based in Lodi, California – not to be confused with more than a dozen banks that have similar names. On its web site, the bank said it is the “largest community bank lender to agriculture west of the Rocky Mountains.”

The bank has 32 locations, all in California. It is a “dividend king,” having increased its dividend to shareholders for 50 years or more – in this case, 58 years. Like Hibbett, this is a repeat pick from a year ago.

Arrow Electronics
ARW

Arrow Electronics Inc., with headquarters in Centennial, Colorado, was founded in 1935 as Arrow Radio. It sells a wide variety of electronic parts to corporate customers. With some 125,000 customers, it’s not excessively dependent on one or two of them.

Nine analysts follow Arrow, and only four recommend it. The problem is that distributors have small profit margins, and Arrow is no exception, with an after-tax margin of 2.7%. Nonetheless, it has grown its earnings at a 15% annual clip for the past decade.

The Record

Starting in 1999, I’ve written 21 columns featuring some picks from the Old Faithful screen. (This is the 22^nd.)

The average 12-month return has been 20.5%, more than double the 7.9% return for the Standard & Poor’s 500 Total Return Index over the same periods.

Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.

My Old Faithful picks have beaten the index 16 times out of 21, and have been profitable 15 times.

My selections from a year ago returned 34.2%, versus 22.0% for the S&P. The most successful pick was Matson
MATX
Inc., up 63.9%. The dud was Farmers & Merchants Bancorp, which was up only 1.3%.

Disclosure: I own Matson personally and for most of my clients.