10 Stocks With Great Earnings-Growth History Selling At A Modest Price

What do you call a stock that has a great earnings-growth history, yet sells for modest price? You might call it a paradox. I call it a candidate for the Bunny Portfolio.

I invented the Bunny Portfolio in 1999 and have written about it almost every year since. It’s named after the Energizer Bunny of battery-commercial fame, which is “still going” long after you would have expected it to run out of juice.

In 21 outings, this hypothetical portfolio has posted an average one-year return of 13.6%, which beats the 9.5% average for the Standard & Poor’ 500 Total Return Index. Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.

Last year, the Bunny beat the index by losing less. The S&P declined 13.4% while the Bunny lost 5.2%. Commercial MetalsCMC
was the best gainer, returning about 49%. Bio-Rad LaboratoriesBIO
was the biggest loser, down nearly 45%.

The Bunny Portfolio has been profitable 13 times out of 21, but has beaten the index only 10 times.

How It Works

To be included, a stock must have averaged 25% earnings growth for the past five years, and yet must sell for 12 times recent earnings or less. That can happen only when investors have grown pessimistic about future prospects. But who said that people are good at predicting the future? The stock must also be based in the U.S. and have a market value of $250 million or more.

There are ten stocks in the Bunny Portfolio each year. I don’t pick them; a computer program automatically selects the five qualifying stocks with the fastest growth rates, and the five with the lowest ratio of stock price to the company’s earnings.

New Selections

Hopping along, let’s see what the Bunny paradigm chooses now. This year’s list is dominated by homebuilders and financial companies.

American Equity Investment Life Holdings Co. (AEL) weighs in at only three times earnings. Based in Des Moines, Iowa, the company primarily sells annuities. It has increased its revenue at a 24% annual clip for the past decade. High inflation could make annuities less attractive, hence the low valuation.

Azenta (ATZA) supplies instruments, tissue-sample storage equipment and software to the biotech industry. The Chelmsford, Massachusetts company was formerly known as Brooks Automation. It has a strong balance sheet, with very little debt.

Bain Capital Specialty Finance (BCSF), of Boston, is an offshoot of Bain Capital, the private equity firm once headed by Mitt Romney, for former presidential candidate. While parent Bain lends mostly to large companies, this company aims to work with “middle market” companies.

BrightSphere Investment Group (BSIG), based in Boston, is an investment management company partially owned by Paulson & Co. John Paulson, famous for foreseeing the real-estate crisis of 2008 and making some $20 billion as a result, sits on the board of directors.

Carlyle GroupCG
, based in Washington D.C., manages investment funds that invest in natural resources, private companies, or real estate. Profits were mediocre in 2012-2016, then picked up dramatically in 2017 through 2021.

Century Communities (CCS), out of Greenwood Village, Colorado, is a homebuilder. Homebuilding stocks soared in the past five years but plunged in the past year as investors figured that rising mortgage rates would be poison to home building. So far, Century’s profits are holding up well.

MatsonMATX
, with headquarters in Honolulu, Hawaii, carries ocean freight between Hawaii, the continental U.S. and various islands in the Pacific. In the past five years it has grown its earnings at a 38% annual pace, yet the stock sells for only two times earnings.

M/I Homes (MHO), a homebuilder based in Columbus, Ohio, has gradually improved its profitability over the past decade. M/I and Century Communities both sell for a mere three times earnings–a sign that investors feel sure that homebuilding will hit the wall in 2023.

Owl Rock Capital (ORCC), of New York City, is another lender to mid-sized companies. This stock has gone nowhere for a decade. Profits were long mediocre, but have picked up recently.

PennyMac Financial ServicesPFSI
makes the Bunny roster for a fourth year in a row. That means investors were skeptics as long ago as December 2019. Yet the stock has risen more than 80% in the past three years. The company, out of Westlake, California, is a mortgage banker.

Disclosure: I own Azenta and Matson personally and for most of my clients.