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My Sane Portfolio Takes It on the Chin

GuruFocus.com

The market battered my Sane Portfolio in the past 12 months, as it posted its worst result ever.

The Sane Portfolio is intended to provide investment ideas for middle-of-the-road, slightly conservative investors. I've been compiling this theoretical portfolio each August since 1999, with a three-year hiatus in 2007 through 2009.

Over the years, it has done pretty well, and generally beaten the Standard & Poor's 500 Index. But not last year.


The portfolio fell 10% from Aug. 5, 2019 through July 31, 2020. Meanwhile, the Standard & Poor's 500 Index returned 14.6%.

Over 18 years, the S&P 500 has averaged a total return of 9.09% per year (defining a year as the time between columns, which is usually 51 weeks and two days). The Sane Portfolio, after the past year's big slip, is just a whisker ahead of it at 9.10% per year.

It's time to continue the tradition, and root for a comeback.

Back again

The Sane Portfolio always contains 12 stocks. I choose them from among a few dozen stocks each year that meet seven criteria for earnings growth, profitability, debt control and valuation. The criteria are listed at the end of this column.

No single criterion is especially hard to meet. Yet very few stocks - only 4% of stocks with a market value of $1 billion or more -- meet all of them.

Once I've chosen a stock, it stays in unless and until it fails one of the seven criteria.

This year the coronavirus bear market knocked half a dozen stocks out of the portfolio - most notably Carnival Corp. (NYSE:CCL). The cruise line stock fell 68% after I put it into the portfolio a year ago.

Six stocks that still meet all the standards return. Lear Corp. (NYSE:LEA), which makes seats and electrical systems for cars, is back for a fifth time.

Tyson Foods Inc. (NYSE:TSN), which produces chicken, beef, pork and prepared meals, is back for a fourth appearance.

Back for a third time is Allstate Corp. (NYSE:ALL), the insurer you are "in good hands with."

Two other insurance companies, Cigna Corp. (NYSE:CI) and MetLife Inc. (NYSE:MET), return for a second year. So does Textron Inc. (NYSE:TXT), a conglomerate that produces Bell helicopters and Beechcraft and Cessna small planes.

The newcomers

There are six open slots to fill. I'll start with Tech Data Corp. (NASDAQ:TECD). The Clearwater, Florida-based company distributes technology products such as computers, printers and software. The company has a 13-year profit streak going, though of course that could be endangered by the current recession.

Comfort Systems USA Inc. (NYSE:FIX) is a heating, ventilation and air conditioning contractor based in Houston. It posted profits in nine of the 10 years preceding the coronavirus pandemic. I figure that building owners might try to improve ventilation, which could help this company.

Esco Technologies Inc. (NYSE:ESE), out of St. Louis, supplies filtration, test and fluid control systems, mainly to the aerospace industry and the utility industry. It has been profitable in 14 of the past 15 years. As with Comfort Systems, profits were accelerating before the pandemic hit.

More boxes

As people shop more on the Internet and less in stores, they must get their packages delivered. One beneficiary is Packaging Corp. of America (NYSE:PKG), which makes corrugated cardboard. The Lake Forest, Illinois-based company has achieved a return on equity better than 20% seven years in a row.

From Kenosha, Wisconsin comes Snap-On Inc. (NYSE:SNA), which makes tools and software for car repairmen. I hope I'm wrong, but I think the current recession will be longer than average. If people can't afford new cars, they may spend more on repairing their old ones.

The recession may harm homebuilders, yet I feel that their long-term prospects are good. The pandemic may cause people to want to move out of crowded cities into the suburbs, and could light a fire under homebuilding.

One stock I especially like in the group is D.R. Horton Inc. (DHI). When I enter a troubled industry, I like to go with a stock that has a strong balance sheet. D.R. Horton has debt equal to only 39% of stockholders' equity.

In 18 outings, the Sane Portfolio has been profitable 14 times, and has beaten the S&P 500 nine times. Bear in mind that my column recommendations are theoretical and don't reflect actual trades, trading costs or taxes. Their results shouldn't be confused with the performance of portfolios I manage for clients. And past performance doesn't predict future results.

Disclosure: A few of my clients own Allstate, MetLife, Snap-on and/or Tyson Foods. I don't own them personally.

The seven eligibility criteria for the Sane Portfolio are: Market value of $1 billion or more, return on stockholders' equity of 10% or more, earnings growth averaging 5% or more the past five years, debt less than stockholders' equity, stock price less than 18 times earnings, stock price less than three times book value and stock price less than three times sales.

John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.

This article first appeared on GuruFocus.