Keep Sane with safer stock picks

Most of my clients want medium-risk portfolios. A few tilt more to the conservative side.

To find stocks for the more conservative ones, a tool I use is the Sane Portfolio. This is a hypothetical collection of a dozen stocks that seem solid to me from several vantage points.

To be eligible for the Sane Portfolio, a stock must:

■ Have a market value of $1 billion or more.

■ Achieve a return on stockholders’ equity of 10 percent or better.

■ Post earnings growth averaging at least 5 percent for five years.

■ Have debt less than stockholders’ equity.

■ Sell for less than 18 times pershare earnings.

■ Sell for less than three times per-share revenue.

■ Sell for less than three times book value (corporate net worth per share).

No single criterion is especially hard. But meeting all of them is a challenge. Only about 4 percent of all stocks can jump all those hurdles.

Last year, the Sane Portfolio had a very pleasant gain, returning 47 percent while the index was up 36 percent. A double in Textron Inc. (TXT) shares helped the cause.

Returnees

Tyson Foods Inc. (TSN) heads the list of returnees. It’s back for a fifth year.

Allstate Corp. (ALL), the big car and home insurer, joins the roster for a fourth year.

Cigna Corp. (CI), a health insurer, is back for year three.

D.R. Horton Inc. (DHI), the nation’s largest homebuilder, returns for its second appearance.

New picks

One new pick I’m excited about is Synchrony Financial (SYF), which issues and processes credit cards for Amazon.com, Lowe’s and many other companies. I expect people to heat up their plastic this year, and I think credit card defaults will probably decline.

Nucor Corp. (NUE), the nation’s largest steel maker, should benefit from the infrastructure bill working its way through Congress.

Paccar Inc. (PCAR), which makes Kenworth and Peterbilt trucks, was in the Sane Portfolio in 2019-2020. After declining 11 percent in the past year, the stock is cheap enough to qualify again.

A debt-free choice is Encore Wire Corp. (WIRE), which makes wire and cable. Sounds prosaic? Perhaps. Yet Encore’s earnings growth has averaged 14 percent a year for the past 10 years.

People seem skeptical that MarineMax Inc. (HZO), the nation’s largest boat retailer, can keep up the fine results it has been achieving. The 10-year revenue growth rate is 13 percent annually.

If the lingering pandemic causes people to get their recreation outdoors rather than indoors, that would be good for Johnson Outdoors Inc. (JOUT). The company, based in Racine, Wisconsin, makes fishing and diving equipment. Johnson’s debt is only 11 percent of the company’s equity.

With technology stocks expensive, the portfolio is light in that sector. But we can include Tempe, Arizona-based Amkor Technology Inc. (AMKR), which provides packaging and test services to semiconductor makers. The stock sells for 14 times recent earnings and 11 times what analysts expect for next year.

For my final choice, I’ll go with Laboratory Corp of America Holdings (LH). I think we have entered a world where medical testing will be more common than it was before 2020.