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When an 18% return isn’t good enough

Is it possible to be dissatisfied with an 18 percent return?

Well, yes.

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My Sane Portfolio returned 18.6 percent from Aug. 7, 2012, through Aug. 2, 2013. But given that the Standard & Poor’s 500 Index returned 24.7 percent for the same period, my portfolio’s performance was no more exciting than kissing your sister.

The Sane Portfolio is intended as a middle-of-the-road, slightly conservative stock portfolio. I first compiled it in 1999 and have published it annually since then, with a three-year hiatus from 2007 to 2009.

Last year’s Sane Portfolio had several solid winners, including Western Digital Corp., up 59 percent, and Cisco Systems Inc., up 57 percent. But three stocks had only tepid gains, and Cliffs Natural Resources Inc., a producer of iron ore and coal, plunged 51 percent as demand from China weakened.

In 11 previous outings, the Sane Portfolio has produced one-year total returns (including reinvested dividends) averaging 11.4 percent. That compares with 7.2 percent for the S&P 500.

The Sane Portfolio has been profitable 10 times out of 11, and it has beaten the S&P seven times out of 11.

Bear in mind that past performance doesn’t predict future results. The returns on my column recommendations are hypothetical and don’t reflect trading costs or taxes. And performance of my column selections should not be confused with that of actual portfolios I run for clients.

To be considered for this portfolio a stock must have:

 A market value exceeding $1 billion.

 Debt less than stockholders’ equity.

 Earnings growth averaging 5 percent or better the past five years.

 A return on stockholders’ equity of 10 percent or more in the latest fiscal year.

 A stock price less than 18 times earnings. less than three times revenue, and less than three times book value.

None of the criteria are exceptionally demanding. But meeting all of them is hard.

Of the 1,968 US stocks with a market value of $1 billion or more, only 90, or 4.6 percent, currently meet all of the criteria.

From the list of qualifying stocks, I initially selected a dozen stocks by judgment. Each year, stocks drop out if they no longer meet one of the criteria. Those that still meet the standards stay in.

The returnees this year are Exxon Mobil Corp. (its fourth appearance), Cubic Corp. (fourth time), Western Digital Corp. (third time), Cisco Systems Inc. (second time), Dell Inc. (second time), and Mosaic Co. (second time).

I currently own Cubic and Western Digital personally and for most of my clients.

To the six returnees, I am adding six new stocks to Sane Portfolio XII.

Agco Inc. of Duluth, Ga., is a worldwide distributor of agricultural products. Its earnings have been growing at about a 16 percent clip. Europe, Africa, and the Middle East account for about half of its sales, North America about a quarter, and Latin America most of the rest.

Buckeye Technology Inc. probably made the cellulose linings of the disposable diapers you used on your baby. It also makes other cellulose and absorbent products. The Memphis company has also increased its earnings at a 16 percent rate.

National Oilwell Varco Inc. is a leading supplier of equipment for oil and gas drilling. Like many players in the energy industry, it is based in Houston. Unlike most of its rivals, it is consistently profitable, having posted positive earnings in each of the past 10 years, including the recession-ravaged years of 2008-2009.

Norfolk Southern Corp. in Norfolk, Va., is a railroad that carries coal and a variety of other goods over 20,000 miles of track in the eastern half of the United States. The stock is cheaper than that of most railroads because coal has been losing market share to natural gas. I own this stock personally and for most clients.

Timken Co. makes ball bearings and related industrial equipment. The Canton, Ohio, company has shown good growth and profitability in recent years. Last year it earned 18 percent on stockholders’ equity.

World Fuel Services Corp., with headquarters in Miami, provides fuel, maps, and other services for ships, planes, and trucking companies. It posted sales of $42 billion last year but has a stock-market value of only $2.5 billion, giving it a remarkably low price/sales ratio.

We will see whether my Sane Portfolio selections add to readers’ sanity — and net worth — in the coming year. I am hoping that this time they will both make money and beat the overall market.

John Dorfman is chairman of Thunderstorm Capital in Boston. His firm or its clients may own or trade securities discussed in this column.
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