December 9, 2024 (Maple Hill Syndicate) Can you buy a stock with red-hot earnings growth for a modest price?
You can, but only if most investors think its growth streak is ended, or is about to end.
That's the idea behind my Bunny Portfolio, now going into its 24th year. To get into this hypothetical portfolio, a stock must have five-year historical earnings growth of 25% a year or better, yet the stock price must be 12 times earnings or less.
The stocks are selected by a formula, not by judgment. It's a ten-stock portfolio, featuring the fastest growers and the cheapest stocks in the qualifying group.
The moniker Bunny Portfolio is a tip of the hat to the Energizer Bunny, which in commercials is still going long after you would have expected it to keel over.
Over 23 years, the Bunny Portfolio has averaged a 15.5% return, nicely above the 10.9% figure for the Standard & Poor's 500 Total (EPA:TTEF) 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.
Of my 23 previous Bunny Portfolios, 15 have been profitable, but only 11 have beaten the S&P 500. And now can you smell the carrots? here comes the 24th Bunny Portfolio.
A-Mark
A-Mark Precious Metals Inc. (NASDAQ:AMRK), doesn't mine precious metals; it deals in them, wholesaling gold, silver, platinum, copper and palladium. Its profits have grown by more than 63% a year over the past five years, but fall badly last year. The stock, at $29, is at about the same level as three years ago.
Academy Sports
Back on the Bunny list for a second straight year is Academy Sports and Outdoors Inc. (NASDAQ:ASO), which sells hunting, fishing and sports equipment and related clothing. Based in Katy, Texas, Academy has grown its profits by an average of 86% a year over the past half-decade.
Atkore
Atkore Inc. (NYSE:ATKR), which is headquartered in Harvey, Illinois, makes electrical conduit, security bollards (used to block cars from entering certain spots) and other industrial products. The stock trades for only seven times recent earnings.
Cal-Maine Foods (NASDAQ:CALM)
Another returning member of the Bunny Portfolio is Cal-Maine Foods Inc. (NASDAQ:CALM), the largest U.S. egg producer. The company, with headquarters in Ridgeland, Mississippi, has no debt and is a generous dividend payer in good years. Its profits are often influenced by avian flu and by corn (chicken feed) prices.
Conduent
Conduent Inc. (NASDAQ:CNDT), out of Florham Park, New Jersey, provides digital payment services. It was spun out of Xerox Corp (NASDAQ:XRX). in 2017. This stock has been a poor performer, down about 37% in the past five years. It is barely followed on Wall Street, but the three analysts who do cover it rate it a buy.
Crescent Capital
Based in Los Angeles, Crescent Capital BDC Inc. (NASDAQ:CCAP) is a business development company. It provides loans and equity financing to mid-sized businesses to help them improve or accelerate their operations. Over the past five years it has grown profits at better than a 30% clip.
Crocs (NASDAQ:CROX)
Crocs Inc. (NASDAQ:CROX), the maker of those shoes with ventilation holes in them, posted losses in 2014 through 2018, but is about to post its sixth straight profitable year. The stock seems cheap to me at about eight times earnings. Crocs is one of three companies returning from last year's Bunny roster.
First Citizens
First Citizens BancShares Inc. (FCNCB) is based in Raleigh, North Carolina, and shouldn't be confused with Citizens Financial Group Inc. (NYSE:NYSE:CFG), which hails from Providence, Rhode Island. It has been profitable every year since it went public in 1992.
Forestar Group
A homebuilder active in 24 states, Forestar Group (NYSE:FOR) is based in Arlington, Texas. It is 75% owned by D.R. Horton Inc., the largest U.S. homebuilder. Despite rapid earnings growth, Forestar stock sells for only about seven times earnings. I'm optimistic on the homebuilding industry.
Merchants Bancorp
Based in Carmel, Indiana, Merchants Bancorp (NASDAQ:MBIN) has seen its stock triple in the past five years. The price/earnings ratio is below seven, which seems like a major bargain to me. I like to see banks earn 1.0% on assets or better. Merchants Bancorp has jumped that hurdle eight years in a row.
Last Year
The past year was a disappointing for the Bunny. It posted a 15.5% return, but the Standard & Poor's 500 Total Return Index was up 33.6%.
The most successful Bunny selection from December 2023 was Cal-Maine Foods, which returned 104% including dividends. Least successful was Albermarle Corp. (NYSE:ALB), which fell 16%.
Disclosure: I own Cal-Maine Foods personally and for almost all of my clients. I own Merchants Bancorp personally and in a hedge fund I run. John Dorfman is chairman of Dorfman Value Investments in Boston. His firm of clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.