John Dorfman , president of Dorfman Investments in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or its clients may own or trade investments discussed in this column.
Obscure Firms Are Among the 15 Most Profitable: John Dorfman
Aug. 17 (Bloomberg) -- Since 1998, well-known companies such as Microsoft Corp. (MSFT), Bristol-Myers Squibb Co. (BMY) and Oracle Corp. (ORCL) have starred in my annual list of the 15 most profitable companies in the U.S.
No more.
Those companies are missing from the ``Fab 15'' this year. In their place are obscure outfits that have burned up the track lately with red-hot profitability numbers -- the likes of Microstrategy Inc. (MSTR), Calamos Asset Management Inc. (CLMS) and OptionsXpress Holdings Inc. (OXPS).
The shift suggests that the profitability torch has been passed from household-name companies to a new generation of corporations poised to exploit profitable niches.
Each year I publish a list to honor companies that have achieved outstanding profitability. An imaginative editor dubbed it the Fab 15.
Qualifying companies must have a market value of $750 million, a return on stockholders' equity of 30 percent, a return on total capital of 15 percent, and a profit margin of 20 percent or more. If more than 15 companies qualify, I break ties by return on equity.
Honor Roll
Inclusion in the Fab 15 is an honor. It is not necessarily a stock recommendation. The problem with most of the Fab 15 stocks is that they are expensive. Investors already recognize their excellence.
I have published the Fab 15 list six times (August 1998 and each August since 2000). On average, the Fab 15 have achieved a 12- month total return (including dividends) of 3.3 percent, a smidgen below the 3.4 percent average for the Standard & Poor's 500 Index.
Most years I recommend a few stocks within the Fab 15. So far my recommendations have shown an average 12-month gain of 13 percent.
In the past 12 months, the picture was reversed. From Aug. 17, 2004, through Aug. 12, 2005, the Fab 15 returned 24 percent (including dividends) compared with 16 percent for the S&P 500.
The three Fab 15 stocks I recommended a year ago -- Janus Capital Group Inc. (JNS), Marvel Enterprises Inc. (MVL) and Merck & Co. (MRK) -- were up only 4.4 percent.
Marvel returned 34 percent and Janus Capital 7.6 percent. Merck spoiled the party with a 29 percent negative return. This was a double disappointment, since I owned Merck for clients and personally.
Meeting the Test
This year, 41 companies met the statistical criteria. The highest return on equity (ROE), 118 percent, was posted by Microstrategy, a McLean, Virginia, company that makes software to mine databases. It had lost money in six of the eight years from 1996 through 2003.
Next best was Calamos Asset Management, a Naperville, Illinois, money manager that went public in October. Its ROE was 104 percent.
A whisker behind was OptionsXpress with a 103 percent ROE. The Chicago brokerage firm, which went public in January, specializes in options trading. In July it said that it is handling 3 percent of options trades in the U.S. and expects to increase that share.
Kronos Worldwide Inc. (KRO) of Dallas, which makes titanium dioxide pigments, was fourth with a 100 percent return on equity.
Cleveland-Cliffs, Cousins
Cleveland-Cliffs Inc. (CLF), a Cleveland, Ohio, company that produces iron ore pellets, placed fifth with a 98 percent ROE. I like its balance sheet, with debt only 9 percent of equity. At 11 times earnings and 1.2 times revenue, it seems reasonably priced.
Cousins Properties Inc. (CUZ), a real-estate investment trust based in Atlanta, came in sixth with an 85 percent ROE. Cousins also made the list a year ago.
Shuffle Master Inc. (SHFL), with a 77 percent ROE, placed seventh. The Las Vegas-based company makes card-shuffling systems and other equipment for the casino industry. Analysts project 27 percent earnings growth for the next five years, which I think is optimistic. The company's debt is seven times equity -- too high for my taste.
Spots 8 through 13 go to MEMC Electronic Materials Inc. (WFR), Las Vegas Sands Corp. (LVS), KCS Energy Inc. (KCS), W&T Offshore Inc. (WTI), Vintage Petroleum Inc. (VPI) and Tessera Technologies Inc. (TSRA).
Ultra Petroleum Corp. (UPL), in 14th place, is the only other repeater from last year, along with Cousins. Many of Ultra's fields produce low-quality crude, but they are highly profitable at today's oil prices.
Waddell & Reed Financial Inc. (WDR), with a 52 percent ROE, occupies the final spot. The Overland Park, Kansas, money manager was also listed in 2002.
Any Juice Left?
I mildly like Cleveland-Cliffs and two of the energy stocks -- KCS Energy at 12 times earnings and Vintage Petroleum at 14 times earnings. Unfortunately, Vintage is up 67 percent this year, Cleveland-Cliffs 50 percent and KCS 46 percent. There is some question how much juice is left in the orange.
What happened to some of the past winners? Four-time winner Bristol-Myers Squibb has seen its profitability fade from great to very good, posting a 24 percent return on equity last year.
Eli Lilly & Co. (LLY), another four-time honoree, saw ROE drop to less than 18 percent.
SEI Investments Co. (SEIC), a four-time listee, still meets the criteria, but placed 19th in ROE, missing the cut.
The other four-time winner, snuff maker UST Inc., has seen its stockholders' equity shrink under the impact of lawsuits and antitrust actions. Its return on equity is a non-meaningful figure under Bloomberg's calculation method.
Three-time winner Oracle met the selection criteria but dropped to 40th in return on equity, with a 31 percent ROE. And three-time honoree Plantronics Inc. (PLT) missed the cut with a 28 percent ROE.
To contact the writer of this column:
John Dorfman in Newton Centre, Massachusetts, at jdorfman@bloomberg.net.
Last Updated: August 17, 2005 00:01 EDT
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