Every 35 to 120 minutes, Old Faithful Geyser reliably erupts in Yellowstone National Park. Inspired by this natural phenomenon, I have developed a stock screening method that identifies companies with a similar pattern of consistent performance and growth. I call it the “Old Faithful” screen.
The screen looks for stocks that:
– Have a history of consistent earnings growth
– Trade at a reasonable price relative to their earnings
– Have a strong financial position
Once a year, I feature a few stocks that pass my Old Faithful screen criteria. Here are my five picks for the coming year:
Lennar (LEN)
Despite concerns about rising interest rates and affordability, I believe there is pent-up demand for single-family homes. Lennar, one of the largest homebuilders in the US, is well-positioned to benefit from this trend. The company focuses on medium-priced homes, with an average selling price of just over $400,000. Its shares trade at less than 11 times earnings, which I consider cheap, and it has a five-year earnings growth rate above 28%.
Agco (AGCO)
Agco manufactures tractors and other agricultural equipment. The company has benefited from strong demand for its products in recent years, and its latest two fiscal years were its best since 2011. While analysts expect moderate earnings growth in the next two years, the stock currently trades for less than eight times recent earnings, compared to an average valuation of over 15 times earnings in the past decade. I believe the stock is attractively valued.
Hibbett (HIBB)
Hibbett operates a chain of sporting goods stores in 36 states. The company has been profitable every year since its initial public offering in 1996, even during three recessions. Its return on equity has exceeded 20% in eight of the past 12 years. Analysts expect flat earnings growth for the next three years, but the stock trades for less than nine times earnings. I selected Hibbett a year ago, and it has returned 26% since then, including dividends.
Farmers & Merchants Bancorp (FMCB)
Farmers & Merchants is a nearly debt-free community bank based in California. It is the largest community bank lender to agriculture west of the Rocky Mountains. The bank has increased its dividend to shareholders for 58 years in a row, making it a “dividend king.” I selected Farmers & Merchants a year ago, and it has returned 1.3% since then.
Arrow Electronics (ARW)
Arrow Electronics sells a wide variety of electronic parts to corporate customers. The company has grown its earnings at a 15% annual clip for the past decade. While distributors typically have small profit margins, Arrow’s after-tax margin of 2.7% is respectable. Nine analysts follow Arrow, and only four recommend it. I believe the stock is undervalued.
My Old Faithful picks have beaten the S&P 500 Total Return Index 16 times out of 21 and have been profitable 15 times. My selections from a year ago returned 34.2%, versus 22.0% for the S&P. While past performance is not a guarantee of future results, I believe these five stocks have the potential to generate strong returns in the coming year.
