Dorfman: Chew on these 5 stocks for growth at a reasonable price
In this column, I am a cheapskate 51 weeks a year.
But once a year, at Thanksgiving time, I offer a few recommendations on stocks that are a little more expensive than I would usually buy — 16 to 20 times earnings, versus my normal limit of 15.
These are GARP stocks, the abbreviation standing for growth at a reasonable price.
GARP is a legitimate school of investing, just not my school. However, my GARP recommendations have done well over the years since I began this series of articles in 1998.
In 14 previous columns featuring GARP picks, my recommendations have averaged a 12.2 percent return over 12 months, compared to 8.1 percent for the Standard & Poor's 500 Index.
Ten of the 14 columns have beaten the S&P 500, and nine of the lists have been profitable.
Of course, past performance doesn't guarantee future results. My column picks are theoretical and don't reflect actual trades, trading costs or taxes. The record of my column selections shouldn't be confused with the performance I achieve for clients.
My GARP selections last year did horribly — by far my worst performance in this series.
Fossil Group (FOSL) was down 67 percent, Western Digital Corp. (WDC) fell 39 percent, and PRA Group Inc. (PRAA) dropped 29 percent. Only Apple Inc. (AAPL) eked out a small gain, about 3 percent. My picks as a group fell 32.8 percent while the S&P 500 returned 3.2 percent.
Baseball players say if you're going to lose a game, you may as well lose 18-0 and get it out of your system. In that spirit, I'm ready to try again. Here are five picks for a new — and hopefully better — GARP feast.
Lanstar System
Lanstar System Inc. (LSTR) is a logistics company based in Jacksonville, Fla. It ships good through its own trucking network, and also arranges for shipments by air and water.
What chiefly attracts me to Lanstar is its outstanding profitability. Last year it posted a return on stockholders' equity of 34 percent. By comparison, the average company's return on equity in the past four quarters has been about 8 percent. Growth numbers also look good. The stock sells for 19 times recent earnings and 17 times analysts' estimated earnings for 2016.
Herman Miller
Herman Miller Inc. (MLHR) of Zeeland, Mich., makes furniture for offices, airports, hospitals and other institutional settings. It has good years and bad ones, but the recent trend has been favorable. Last year it posted record earnings on near-record revenue.
Because I am more optimistic than most people that the U.S. economic recovery is still gathering momentum, I believe Herman Miller is in a well-positioned industry. The stock sells for 18 times recent earnings but only 14 times analysts' estimates for next year.
General Dynamics
Defense stocks lifted this month after the terrorist attacks in France and a vigorous military response by France against the Islamic State. If I thought that was an isolated incident, I wouldn't chase these stocks on strength. However, I am afraid that the Paris massacres were only one in a string of military and quasi-military challenges the U.S. and its allies will face over the next few years.
Therefore I like the defense group in general, and I have always regarded General Dynamics (GD) as one of the best-run companies in the industry. The stock fetches 17 times the past four quarters' earnings and 15 times analysts' guess on 2016 earnings.
Southwest Airlines
I like the airline industry now because it is consolidating, leading to more firmness in fares, and because fuel costs have come down a lot since mid-2014. Southwest Airlines Co. (LUV) has a good reputation for managing its fleet, for hedging fuel costs appropriately, and for offering attractive prices to the flying public. Its operating profit margin is much higher than that of most airlines.
Shares in Southwest trade for 17 times recent earnings but only 12 times analysts' projections for next year, meaning that Wall Street expects earnings to rise smartly in 2016.
Jones Lang
Jones Lang LaSalle Inc. (JLL) is a major player in the office-space business. It is a commercial real estate broker, arranges office leases, manages properties, and provides a variety of consulting services. With some 230 offices in 80 countries, it is one of the largest such firms in the world.
Earnings have grown at a 28 percent clip in recent years as the company has recovered from the financial crisis. The stock seems reasonably priced at 17 times recent earnings and 16 times next year's projected profits.
Disclosure: I own Apple and Western Digital personally and for most of my clients. I own General Dynamics for some clients. Some of my family members own shares in Southwest Airlines. I have no positions in the other stocks mentioned above.
John Dorfman is chairman of Dorfman Value Investments in Boston and a syndicated columnist. He can be reached at jdorfman@dorfmanvalue.com. His firm or clients may own or trade securities mentioned in this column.
