Old Faithful geyser in Yellowstone National Park is known to erupt regularly every 35 to 120 minutes. This famous geyser has inspired a stock screen that focuses on finding stocks with specific criteria such as a 15% return on stockholders’ equity, debt less than stockholders’ equity, selling for 15 times earnings or less, selling for two times book value or less, and having grown earnings at a 10% annual clip for the past five years. The author features five stocks based on this screen every year.
The first stock on the list is Lennar, a homebuilder based in Miami, Florida, that sells homes in 26 states. The author believes there is pent-up demand for single-family homes and expects sales to surge if mortgage rates decrease. Lennar’s shares trade at less than 11 times earnings, making it a cheap option with a five-year earnings growth rate of above 28%.
Agco Corp., based in Duluth, Georgia, is known for making tractors under the brands Massey Ferguson, as well as other agricultural equipment. The company’s latest fiscal years have been the best since 2011, and analysts expect the next two years to be moderately less profitable. The stock sells for less than eight times recent earnings, presenting a bargain opportunity according to the author.
Hibbett Inc., a smaller stock, operates the Hibbett chain of sporting goods stores with over 1,100 locations in 36 states. Despite showing a profit every year since going public in 1996, the company’s profits are expected to be flat for the next three years. Hibbett’s stock sells for less than nine times earnings and has returned 26% since being selected a year ago.
Farmers & Merchants Bancorp is a nearly debt-free choice based in Lodi, California. The bank has been continuously increasing dividends to shareholders for over 50 years and is the largest community bank lender to agriculture west of the Rocky Mountains. Arrow Electronics Inc., based in Centennial, Colorado, sells electronic parts to corporate customers and has shown a 15% annual growth in earnings over the past decade.
Over the years, the author’s Old Faithful screen picks have generated an average 12-month return of 20.5%, outperforming the S&P 500 Total Return Index. The author’s column results are hypothetical and should not be confused with client results, but the Old Faithful picks have beaten the index 16 times out of 21 and have been profitable 15 times. The author’s picks from a year ago returned 34.2%, with the most successful pick being Matson Inc. rising by 63.9%.
