My Sane Portfolio takes it on the chin
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-theroad, 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 August 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 in fine print 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. 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. (LEA), which makes seats and electrical systems for cars, is back for a fifth time.
Tyson Foods Inc. (TSN), which produces chicken, beef, pork and prepared meals, is back for a fourth appearance.
Back for a third time is Allstate Corp. (ALL), the insurer you are “in good hands with.”
Two other insurance companies, Cigna Corp. (CI) and MetLife Inc. (MET) return for a second year. So does Textron Inc. (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. (TECD). The Clearwater, Florida, 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. (FIX) is a heating, ventilation and air conditioning contractor based in Houston, Texas. It posted profits in nine of the ten years preceding the coronavirus pandemic. I figure that building owners might try to improve ventilation, which could help this company.
Esco Technologies Inc. (ESE), out of St. Louis, Missouri, 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 (PKG), which makes corrugated cardboard. The Lake Forest, Illinois, company has achieved a return on equity better than 20% seven years in a row.
From Kenosha Wisconsin comes Snap-On Inc. (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 home builders, yet I feel that their longterm 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 home building.
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 $1 billion or more, return on stockholders’ equity 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.
People who care about their credit scores tend to obsess about some things they probably shouldn’t, such as the possibility they might have too much credit.
Let’s bust that myth right upfront: The leading credit scoring formulas, FICO and VantageScore, don’t punish people for having too many accounts. And right now, having access to credit could be a lifeline. In June, the median duration of unemployment was nearly14 weeks, according to the U.S. Bureau of Labor Statistics. “Median” is the halfway point, which means half of the unemployed had been out of work longer. After the Great Recession, the median length of unemployment peaked at 25 weeks.
Most households don’t have enough emergency savings to get through extended unemployment. Access to credit ultimately could be what staves off eviction, keeps the lights on and puts food on the table.
Obviously, you can have too much credit if it would tempt you to spend recklessly. And the more accounts you have, the easier it might be to forget a payment — which can be devastating to your scores — or fail to detect signs of fraud. But that doesn’t mean you should worry about applying for the credit you need in the misguided notion that having too much credit is bad for your scores.
It’s not how many cards, but how you use them
Before the advent of modern credit scores in the1980s, lenders did worry that people who had access to a lot of credit would suddenly run up big balances, then default, says credit expert John Ulzheimer, who formerly worked for FICO and for Equifax, a credit bureau. But data scientists have since learned otherwise. People who had been responsible with credit in the past tend to continue being responsible.
Although you can’t have too much credit, you can have too much debt. Having big balances relative to your credit card limits, or a bunch of cards with balances, can definitely hurt your scores, credit scoring experts say.
Even small balances and balances you pay in full can be problematic. Credit scoring formulas consider how many of your accounts have balances and how much of your credit limits you’re using, among other factors. The scoring system uses the balances reported by your creditors, which are generally the amounts from your last statement. You could pay those balances off promptly, but they still show up on your credit reports and affect your scores.
Credit-building strategies
If you’re trying to polish your credit, Ulzheimer recommends using one or two credit cards and not charging more than10% of their limits. That may require making more than one payment each month to keep the balances low or asking issuers for higher credit limits.
If you do use more than a couple of cards, paying the balances off before the statement closing date will typically result in a zero balance being reported to the credit bureaus, and that can be good for your scores.
Be careful about canceling unused cards, however. Closing credit accounts can hurt your scores, since it reduces your total available credit. If you’re concerned a lender might close an unused card, you can use it occasionally and immediately pay off any charges so you have a zero balance on the statement closing date.
If your credit scores are already high, however, Ulzheimer questions how much effort you should invest in making them higher. Once your scores are over 760 on the commonly used 300-850 scale, you’re getting the best rates and terms lenders offer.
Another thing people worry about, but probably shouldn’t: inquiries. Applications for credit typically have a minor impact on your scores and any impact fades within a year. But Ulzheimer says people are often convinced otherwise.
“People love to obsess about little things that don’t really have a whole lot of influence,” he says.
Liz Weston is a columnist at NerdWallet and a certified financial planner. Email: lweston@nerdwallet.com. Twitter: @lizweston.