October 17, 2023 – Just because someone you respect owns a stock is no reason you should own it. On the other hand, you'd be a fool not to consider it.
Once a year I devote a column to stocks that show up in the course of my competition research. I collect a few stocks from competitors I respect, and call the result the Purloined Portfolio.
This year, two new managers – Bernard Horn (Trades, Portfolio) (Trades, Portfolio) and Nicole Kornitzer -- join the ranks of those from whom I seek to steal ideas. They replace Ken Heebner (Trades, Portfolio) (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) (Trades, Portfolio), who have retired.
Here are five ideas drawn from the portfolios of five of my favorite managers.
Scott Black (Trades, Portfolio) (Trades, Portfolio)
Veteran stock picker Scott Black (Trades, Portfolio) (Trades, Portfolio) runs Delphi management in Boston. I'm not sure I know anyone with a photographic memory, but Black probably comes the closest. My pick from his portfolio this year is Schlumberger Ltd. (SLB, Financial).
When an oil company has a tricky or difficult well to drill, the chances are good they will turn to Schlumberger. Once headquartered in France, it now has its home office in Houston, Texas.
The oil and gas industry went through a bust in 2014-2020, and Schlumberger suffered along with its peers. In the past year, however, its sales have bounced up 12% and earnings have jumped 20%.
The stock has commanded a price averaging 26 times earnings over the past decade. Currently it can be had for 15 times earnings. That puts it in my buy zone.
Randall Eley
Randall Eley runs pension-fund money and a small mutual fund at Edgar Lomax Co. in Alexandria, Virginia. From his holdings, I choose Cisco Systems Inc. (CSCO, Financial).
Cisco was for years the king of computer networking. Now it faces tough competition from upstarts such as Arista Networks (ANET, Financial). But Cisco is still putting up figures that are more than respectable – for example, a 19% net profit margin and a 23% return on stockholders' equity.
Bernard Horn (Trades, Portfolio) (Trades, Portfolio)
Bernard (Bernie) Horn is one of the nation's most experienced managers in the realm of international stocks. But it's a U.S. stock I'm selecting from his Polaris Global Value Fund. That's General Dynamics Corp. (GD, Financial).
War rages between Israel and its neighbors, and between Russia and Ukraine. China challenges the U.S. for world leadership, including military leadership.
In that climate, I think Congress will fork up for defense, despite budget pressures. General Dynamics's product line includes Abrams tanks, submarines, destroyers and military electronics. Its return on equity has been above 15% for 11 consecutive years.
David Katz
As chief investment officer for Matrix Asset Management in New York City, David Katz is familiar to many investors from his television and radio appearances. From his portfolio I'll pick the same stock I chose a year ago: J.P. Morgan Chase & Co. (JPM, Financial).
I'm a fan of J.P. Morgan's CEO, Jamie Dimon. The stock has climbed 50% in the past year, despite a difficult operating climate for banks. Now that the yield curve has un-inverted (long-term interest rates are again above short-term rates, as normal) I think further gains are likely.
The stock sells for only 12 times earnings, an attractive ratio.
Nicole Kornitzer
The Buffalo International Fund, run by Nicole Kornitzer, was in the top half of its peer group in five of the six years from 2018 through 2023, according to Morningstar Inc. This year she is having a tough time, but she is still up 18% over the past 12 months.
From her portfolio, I select Taiwan Semiconductor Manufacturing Co. (TSM, Financial), universally considered the world's premiere chip manufacturer.
The company's after-tax profit margin is 38%. Were it a U.S. company, I believe it would sell for about 50 times earnings. Since it's based in Taiwan which is menaced by China, it sells for 29 times earnings – more expensive than I will usually go for, but worth it in my judgment.
The Record
I've compiled 20 Purloined Portfolios before today. The average one-year return on them has been 12.8%, a bit better than the 11.5% figure for the Standard & Poor's 500 Total Return Index for the same periods.
Sixteen of the 20 portfolios have shown a profit and 10 have beaten the index.
Note 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 selections from a year ago scored a 20.2% return. Normally that would be very good, but the S&P 500 returned 34.9% for the period.
My best pick was J.P. Morgan, which advanced about 54% including dividends. My worst was Jabil Inc. (JBL, Financial), down about 9%.
Disclosure: I own General Dynamics, Jabil and Taiwan Semiconductor personally and for most of my clients. I own J.P. Morgan for some clients.
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 [email protected].
