ShareThis Page
My world according to GARP |

My world according to GARP

| Tuesday, November 27, 2012 12:01 a.m

My personal Thanksgiving tradition is to recommend a few GARP stocks in late November. I’ve done it almost every year since 1998.

GARP stands for growth at a reasonable price. Normally, I won’t pay more than 15 times earnings for a stock. But at Thanksgiving time I let my belt out a little, and recommend a few stocks selling for 15 to 20 times earnings.

The servings have been fairly tasty. In 11 outings, my GARP picks have shown an average 12-month return of 13.5 percent, compared to a return of 5.8 percent for the Standard & Poor’s 500 Index over the same 11 periods.

My GARP selections have been profitable seven times out of 11 and have beaten the S&P 500 eight times out of 11.

Bear in mind that past performance doesn’t guarantee future results. Results of my column recommendations should not be confused with the performance of portfolios I run for clients. And the column results are hypothetical, with no allowance for trading costs or taxes.

Last year’s list was up a respectable 12.6 percent. But it trailed behind the S&P, which returned 19.7 percent (including dividends) from Nov. 22, 2011, through Nov. 21, 2012. The best performer was Union Pacific Corp., up 25 percent. The worst was Bed Bath & Beyond Inc., up 0.6 percent.

There’s a continuum in stock investing. The progression is: distressed, value, GARP, and growth.

Distressed companies are losing money. Sometimes they are in danger of bankruptcy or emerging from bankruptcy. Value companies are generally profitable, but their stocks are cheap because of some real or perceived problem.

Growth companies have rapidly growing sales and earnings — or at least investors anticipate that they will. Accordingly, growth stocks usually sell for high multiples of revenue and earnings.

GARP companies occupy the territory between value and growth. Investors expect their sales and earnings to grow, but there are uncertainties that cause the stocks to sell for multiples are in the middle range.

Now for my 12th almost-annual GARP list. (It’s almost annual because I forgot to do it in 2003, and was temporarily retired as a columnist in 2007 and 2008.)

This year, we’ll begin with Schlumberger Inc. of Houston, Texas. Schlumberger was a pioneer in wireline operations, the art of using mechanical and electronic means to determine the extent and location of petroleum deposits in a well reservoir.

It is still the leader in wireline, and also provides a variety of other technically advanced help to drillers.

Last year, Schlumberger’s return on stockholders’ equity was about 16 percent. That would be good for most companies, but Schlumberger has broken the 30 percent barrier four times in the past decade. In the past 10 years the stock has sold for an average of 27 times earnings. Today it can be bought for 16 times earnings — and I recommend GARP investors do just that.

Tiffany & Co., the jewelry chain, is likely to break last year’s earnings record of $3.40 per share this year. It has grown earnings at a 12 percent pace the past five years, even though those years included a particularly nasty recession in 2007-2009.

Discount stores have had a field day the past five years. I think high-end stores such as Tiffany may do better in the next few years.

Steven Madden Ltd. cashes in on women’s never-ending love for high-fashion footwear. Its earnings declined — but never went negative — during the recession. Now they are back on track for new highs.

Based in Long Island City, New York, Steven Madden has 104 of its own stores and also sells its shoes through department stores and other outlets. With a return on equity of 21 percent last year, and a 23 percent earnings growth rate the past five years, I think this stock is worth more than its recent valuation of 16 times earnings.

Finally, I recommend Cheesecake Factory Inc. of Calabasas Hills, Calif. An unusually wide menu, large portions, high quality for a chain restaurant and relatively high prices are some of its hallmarks.

As with Steven Madden, Cheesecake Factory’s earnings stayed positive during the recession of 2007-09. But it took five years for CAKE’s earnings to regain their 2005 level. Now they are at a new peak, and analysts look for a 16 percent earnings gain this year and 13 percent growth next year.

Cheesecake Factory shares sell for 18 times earnings, which is more than I normally pay but less rich than some of their desserts.

John Dorfman is chairman of Thunderstorm Capital in Boston; jdorfman@thunderstormcapital.

Categories: News
TribLIVE commenting policy

You are solely responsible for your comments and by using you agree to our Terms of Service.

We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.

While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.

We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers

We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.

We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.

We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.

We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.