Dorfman Part 2 Mini-Presentation Expanded
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This is an introductory review of John Dorfman's work, specifically the stock screening methods he uses to produce the outstanding results that he has over the last five to seven years (timeframes differ depending on the strategy). What impresses me most about these strategies is how well they have done during the early innings of a secular bear market for stocks -- I am keenly interested in how different approaches perform in different market environments, and Dorfman definitely has done well in down/sideways/up market conditions in the last half decade or so.
Dorfman takes a very simplistic/timeless approach to determining cheapness (raw P/E ratios), demonstrated historical growth of intrinsic value (earnings growth), operational risk (debt less than equity), and business quality (return on equity). I am aware of the drawbacks of each of these rules-of-thumb (and how a sophisticated investor would put each into context), but recognize that they do fine when used to construct diversified portfolios.
Generally speaking, he looks for companies out of Wall Street's favor that are not expected to have futures that live up to their pasts. Really, this is an attempt to harness the tendency of Mr. Market to push prices below intrinsic value for sizeable baskets of stocks. And this is what every value-oriented strategy detailed on 3GV seeks.
Here are a few of Dorfman's screens and their characteristics/results:
Robot Portfolio -- I previously wrote about this strategy, which returned 727% during the seven years ending December 2005 to the market's 13% gain (http://3gv.blogspot.com/2006/01/mini-presentation-1-robot-portfolio.html) The method here is purely valuation driven, simply looking for the ten lowest P/E stocks among companies with market caps above $500 million that are profitable and have debt less than equity.
Bunny Portfolio -- For the six years from December 1999 to December 2005, the Bunny returned 360% to the market's 1.5%. The Bunny looks for companies that have grown earnings at a compounded annual rate of 25% for the last five years that currently sell for less than 12 times earnings. From the generated list, he buys the five fastest growers and the five lowest P/E ratios. That's it.
Old Faithful (formerly Gold Standard) -- The annual returns of Dorfman's portfolios derived from the Old Faithful screen have been 71%, 527%, 159%, 25%, and 61%. How are such high return companies uncovered? Through five criteria: ROE greater than 15%, five year compounded earnings growth greater than 15%, debt less than 50% of equity, a P/E less than 15, and a market cap above $250 million. Again, those returns were during a bear market.
Of course, picks from these screens will not perform so well every year and in all market conditions. Still, the performance is simply astounding and worthy of close examination. As always, I feel additional steps to optimize the screens can be taken.
Dorfman has other "minor" screens that he uses to generate good investment ideas, and I will touch on these at a later time. I will also build portfolios on a regular basis using his screens with my modifications. There will be an additional portfolio created that buys only the stocks that appear on two or more of the screens.
Fun stuff!
- Ian
Robot:
This is an introductory review of John Dorfman's work, specifically the stock screening methods he uses to produce the outstanding results that he has over the last five to seven years (timeframes differ depending on the strategy). What impresses me most about these strategies is how well they have done during the early innings of a secular bear market for stocks -- I am keenly interested in how different approaches perform in different market environments, and Dorfman definitely has done well in down/sideways/up market conditions in the last half decade or so.
Dorfman takes a very simplistic/timeless approach to determining cheapness (raw P/E ratios), demonstrated historical growth of intrinsic value (earnings growth), operational risk (debt less than equity), and business quality (return on equity). I am aware of the drawbacks of each of these rules-of-thumb (and how a sophisticated investor would put each into context), but recognize that they do fine when used to construct diversified portfolios.
Generally speaking, he looks for companies out of Wall Street's favor that are not expected to have futures that live up to their pasts. Really, this is an attempt to harness the tendency of Mr. Market to push prices below intrinsic value for sizeable baskets of stocks. And this is what every value-oriented strategy detailed on 3GV seeks.
Here are a few of Dorfman's screens and their characteristics/results:
Robot Portfolio -- I previously wrote about this strategy, which returned 727% during the seven years ending December 2005 to the market's 13% gain (http://3gv.blogspot.com/2006/01/mini-presentation-1-robot-portfolio.html) The method here is purely valuation driven, simply looking for the ten lowest P/E stocks among companies with market caps above $500 million that are profitable and have debt less than equity.
Bunny Portfolio -- For the six years from December 1999 to December 2005, the Bunny returned 360% to the market's 1.5%. The Bunny looks for companies that have grown earnings at a compounded annual rate of 25% for the last five years that currently sell for less than 12 times earnings. From the generated list, he buys the five fastest growers and the five lowest P/E ratios. That's it.
Old Faithful (formerly Gold Standard) -- The annual returns of Dorfman's portfolios derived from the Old Faithful screen have been 71%, 527%, 159%, 25%, and 61%. How are such high return companies uncovered? Through five criteria: ROE greater than 15%, five year compounded earnings growth greater than 15%, debt less than 50% of equity, a P/E less than 15, and a market cap above $250 million. Again, those returns were during a bear market.
Of course, picks from these screens will not perform so well every year and in all market conditions. Still, the performance is simply astounding and worthy of close examination. As always, I feel additional steps to optimize the screens can be taken.
Dorfman has other "minor" screens that he uses to generate good investment ideas, and I will touch on these at a later time. I will also build portfolios on a regular basis using his screens with my modifications. There will be an additional portfolio created that buys only the stocks that appear on two or more of the screens.
Fun stuff!
- Ian
Robot:
http://www.bloomberg.com/apps/news?pid=10000039&sid=aF4R1tENwiGA&refer=columnist_dorfman
Old Faithful:
Old Faithful:
http://www.bloomberg.com/news/commentary/jdorfman.html
Gold Standard:
Gold Standard:
posted by Ian at 9:08 PM
1 Comments:
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