Microsoft, Merck And 36 More Stocks With At Least 30% Return On Equity

What do Mike Trout and Microsoft
MSFT
have in common?

Both are members of a 30-30 Club. In baseball, this club contains those stars who have smashed 30 home runs and stolen 30 bases in the same season.

I have a 30-30 club for corporations. To makes it, a company must have a 30% return on stockholders’ equity (high profitability) and a 30% average earnings growth rate over the past five years. It must also have a market value of $2 billion or more.

This year only 38 corporations made my 30-30 club, down from 47 a year ago. All these companies deserve to be honored, but I recommend only a few of their stocks each year. This year I recommend five.

Merck
MRK
stock sells for nearly 20 times earnings. That’s more than I usually pay, but less than Merck’s typical multiple (25) in the past decade. I regard Merck as a research & development powerhouse. It has more than 30 drugs in phase 3 trial. The company’s profit margin last year was 24%.

Nucor
NUE
was a pioneer in recycling steel. It is now the largest U.S. steel company, and one of the most profitable. Paradoxically, the stock sells for a dirt-cheap multiple, five times earnings. Sure, steel is a cyclical industry, vulnerable to recessions–but that’s awfully cheap.

Based in McKinney, Texas, Encore Wire
WIRE
makes wire and cable used in commercial and residential construction. Since its product is a common one, the company tries to differentiate itself by quality control, service and delivery speed. This company has no debt.

A maker of servers, server-management products and data-storage systems, Super Micro Computer
SMCI
is based in San Jose, California. It has manufacturing operations in California, the Netherlands and Taiwan. The stock sells for less than 10 times earnings and the balance sheet looks strong to me.

Selling for only five times earnings, Coterra Energy (CTRA) looks like a bargain. Oil prices have come down this year on recession fears, but I feel that the oil-and-gas industry has a good outlook, partly because the drill count has come way down Coterra does exploration in Appalachia, Texas and Oklahoma.

Other Winners

In addition to the five stocks I recommend above, there are 33 other honorees in the club. Among the very largest companies, Microsoft, Coca-Cola
KO
and Caterpillar
CAT
grace the list.

Other large-cap winners are Albemarle
ALB
, BJ’s Wholesale Club Holdings (BJ), Builders FirstSource
BLDR
, Chipotle Mexican Grill (CMG), Deckers Outdoor
DECK
, Dick’s Sporting Goods (DKS), D.R. Horton (DHI), Jabil
JBL
and Microchip Technology
MCHP
.

Also: Monolithic Power Systems
MPWR
, Pool (POOL), PulteGroup
PHM
and Steel Dynamics
STLD
.

Mid-sized companies on the list are Academy Sports and Outdoors (ASO), Affiliated Managers Group
AMG
, Asbury Automotive Group
ABG
, Auto Nation (AN), Boise Cascade
BCC
, Brunswick
BC
, Commercial Metals
CMC
and Evercore (EVR).

Also: Group 1 Automotive
GPI
, Installed Building Products (IP), Medpace Holdings
MEDP
, Matson
MATX
, Mueller Industries (MLI), TopBuild (BLD), RLI
RLI
, UFP Industries
UFPI
Inc. (UPI) and World Wrestling Entertainment
WWE
and UFPI Industries
UFPI

Past Record

I’ve written about the 30-30 Club most years since 1999. My recommendations have averaged a 9.9%% return (including dividends) over twelve months. The Standard & Poor’s 500 Total Return Index has averaged 7.6% over the same periods. My picks have beaten the S&P 500 11 years out of 18, and have shown a profit in 11 years.

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.

My selections have been profitable ten times out of 17, and have beaten the S&P ten times. A year ago, I recommended six of the 30-30 stocks. Dick’s Sporting Goods (DKS) did best, up 33%, followed by Mueller Industries
MLI
, up 29%. The worst performer was Medifast
MED
, down 45%.

Southern Copper
SCCO
returned 8% and Nexstar Media Group
NXST
inched up 3%. Williams-Sonoma
WSM
lost 21%.

Overall, my picks managed a 1.4% gain while the S&P’s return was negative 5.3%.

Disclosure: I own Merck and Matson personally and for most of my clients. I own Encore Wire personally and for some clients. Some clients own Evercore

EVR
, Microsoft, and/or Nucor.