The Bunny Portfolio is hopping again. It bounced to a 36.6% return in the past year.
I named this hypothetical portfolio after the Energizer Bunny of battery-commercial fame, which is “still going” long after you’d expect it to lose its energy. The companies in the Bunny Portfolio have done well in the past, but investors doubt their future.
Translating this concept into numbers, a Bunny stock must have a market value of $250 million or more and show five-year average earnings growth of 25% or better, yet sell for 12 times earnings or less. Those numbers show that investors don’t believe the great growth of the past can be sustained.
When I created this portfolio two decades ago, I expressed the belief that people are poor predictors of the future, so many of these stocks would be “still going” longer than expected.
It’s a 10-stock portfolio, picked each December by formula. Among qualifying stocks, the formula chooses the five with the fastest historical growth and the five with the lowest ratio of stock price-earnings ratio.
The record
The Bunny Portfolio you’ve about to read about will be my 21st. The previous 20 have averaged a one-year return of 14.5%, well above the 10.7% for the S&0P 500 Total Return Index.
Thirteen of my 20 Bunny collections have been profitable, but only nine have beaten the index.
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.
Last year’s 36.6% return stemmed largely from gains in MVB Financial Corp. (MVBF, Financial) (up 100%) and Tronox Holdings PLC (TROX, Financial) (up 81%). The worst performers were MSG Networks Inc. (MSGS, Financial) (now Madison Square Garden Sports, down 5%) and Equity Commonwealth (EQC, Financial) (down 4%).
The S&P 500 Total Return Index was up 31.02%, so the Bunny beat it by five points.
New picks
Here are the 10 stocks the Bunny paradigm picks now.
Riley Financial Inc. (RILY, Financial) is a financial company out of Los Angeles. It does investment banking, auctions and liquidations and appraisals. It also owns a stake in United Online and magicJack.
Bio-Rad Laboratories Inc. (BIO, Financial) is back for a second year, after posting a 28% gain last year. I like medical testing companies such as this, since I think we have entered a world in which more people will be tested for more things (not just Covid-19) more of the time.
Business First Bancshares Inc. (BFST, Financial), with headquarters in Baton Rouge, Louisiana, focuses on lending to small and mid-sized businesses and also does personal banking. For a small bank, it has a large securities portfolio, worth about $1 billion.
Commercial Metals Co. (CMC, Financial), out of Irving, Texas, is a steel producer and metals recycler in the U.S., Poland and China. It’s a big maker of rebar and other steel products used in nonresidential construction. I figure it should benefit from the recently-passed infrastructure bill.
CTO Realty Growth Inc. (CTO, Financial), based in Daytona Beach, Florida, is a real estate investment trust that owns mainly commercial properties in the South. Investors figure that working from home is the new normal, so this stock is very cheap, selling below book value (corporate net worth per share).
Enova International Inc. (ENVA, Financial) is a consumer loan company based in Chicago that does business via the internet. It lends mostly to non-prime consumers and small businesses, who it says are “frequently underserved by traditional banks.”
Gray Television Inc. (GTN, Financial), based in Atlanta, has given investors a 1,176% return over the past decade, far above the 358% for the Standard & Poor’s 500 Total Return Index. Investors are skeptical because internet advertising is hogging the ad revenue growth.
Nonetheless, Gray managed 17% revenue growth last year and 15% over the past decade. I like it that Gray owns TV stations in 94 markets and is number one in 70 of them.
Northeast Bank (NBN, Financial) is a banking company in Portland, Maine. It has made a lot of Paycheck Protection Program loans and collected hefty fees for doing so.
PennyMac Financial Services (PFSI, Financial) is another repeat; it was up 17% last year. It does mortgage servicing for Fannie Mae (FNMA, Financial) and Freddie Mac (FMCC, Financial). They are government-sponsored enterprises; PennyMac isn’t.
SmartFinancial Inc. (SMBK, Financial) is a bank holding company in Knoxville, Tennessee. While earnings have grown fast, I would say they’ve grown from puny to respectable. I think interest rates will rise over the next two years, helping SmartFinancial and most of the banks and lenders on this list.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
