Old Faithful Fizzled Last Year, But Watch For A Spurt

One of my favorite tools for picking stocks is a paradigm I call Old Faithful, named after the geyser in Yellowstone Park. This paradigm fizzled last year, but has an outstanding long-term record.

To appear on the Old Faithful list, a stock must:

• Post good profits (15% return on equity).
• Have debt under control (debt less than stockholders’ equity).
• Be cheap (no more than 15 times earnings and two times book value).
• Show decent earnings growth (averaging at least 10% a year for the past five years).

Drawn from the Old Faithful screen, here are four stocks I feel optimistic about for the coming 12 months.

Halliburton

Halliburton Co. (HAL), with headquarters in Houston, Texas, is one of the Big Three oilfield service companies. The other two are Schlumberger Ltd. (SLB) and Baker Hughes Co. (BKR).

I consider a 15% return on stockholders’ equity good and 20% excellent. Halliburton notched 20.6% in the past four quarters. Its stock is below $21 as of April 25, and the consensus of Wall Street analysts is that it will rise to $30 in the next 12 months.

Of 29 analysts who cover the stock, 22 recommend it. The stock sells for about 9 times earnings, whereas over the past decade, it’s usually fetched a multiple of about 17.

Cincinnati Financial

Based not in Cincinnati but in Fairfield, Ohio, Cincinnati Financial Corp. (CINF) sells home, auto and life insurance. It does business in all 50 states and has relatively little exposure in Florida, where hurricanes often cause severe losses.

Earnings growth has averaged 13% the past five years. It was faster last year, but I don’t put much emphasis on that since insurers had recently won big price increases from regulators. That’s not a regular occurrence.

The company has very little debt – only 6% of equity.

Oshkosh

Fire engines, garbage trucks, military trucks and aerial work platforms are the main products at Oshkosh Corp. (OSK), based in Oshkosh, Wisconsin. The stock hasn’t gone much of anywhere in three years.

It sells for less than nine times earnings, compared with a typical multiple over the past decade of 15. That measure and other valuation measures are at five-year or ten-year lows.

Analysts are split, with eight recommending the stock and eight demurring. Recession is a risk. In the pandemic recession of 2020, profits fell almost 50%, but the company stayed profitable. In the Great Recession of 2008-2009, it posted a big loss.

I may be prejudiced, since I made a lot of money in this stock many years ago, but Oshkosh looks appealing to me. Investors might want to take a toehold now, and add to it if the shares, now at about $89, fall below $80.

Southern Bancshares

If you have $8,250 lying around, you can buy one share of Southern Bancshares NC Inc. (SBNC), a community bank based in Mount Olive, North Carolina. It has about 60 branches in North Carolina and Virginia.

The stock is thinly traded and, so far as I can tell, completely uncovered by Wall Street. One thing I look for in a bank is a return on assets of 1.0% or better. Southern Bancshares has achieved that in five of the past six years.

Ratings agencies don’t regard the bank’s financial strength highly; its debt gets BBB or BB ratings. That’s probably why the stock is so cheap, selling for four times recent earnings and just over book value (corporate net worth per share).

This is not a conservative investment, but the risk/reward ratio looks good to me.

The Record

Starting in 1999, I’ve written 22 columns featuring picks from the Old Faithful screen. (Today’s is the 23^rd.)

The average 12-month return has been 18.96%, which is more than double the 7.88% return for the Standard & Poor’s 500 Total Return Index over the same 22 periods.

Be aware that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. And past performance doesn’t predict the future.

My Old Faithful picks have beaten the index 16 times out of 22, and have been profitable 15 times.

My selections from a year ago failed to erupt. They fell 13.4%, while the S&P 500 returned 7.0% including dividends. Not a single one of my 2024 picks beat the index. The best performer was Farmers & Merchants Bancorp (FMCB) with a feeble 2.3% gain.

Hibbett Inc. returned only 2.1% even though it was taken over by a British company, JD Sports Fashion. My worst selection was Agco Corp., down 28.9%.

Disclosure: A hedge fund I run owns call options on Schlumberger.