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Nvidia, Adobe, Intuit Lead Stocks With 30% Return On Equity And 30% 5-Year Earnings Growth

Only 41 baseball stars have ever made the 30-30 club – the likes of Hank Aaron, Willy Mays and Mike Trout. To make it, you have to hit 30 home runs and steal 30 bases in a season.

I have a 30-30 club for corporations. To make it, you have to achieve a 30% return on stockholders’ equity in the past year (high profitability) and show 30% annual earnings growth over the past five years.

Companies with a stock-market value of $2 billion or more are eligible – about 1,000 companies. This year, 30 companies made the cut.

I want to honor all of them. But I don’t recommend all of their stocks. When a company’s excellence is well recognized, the stock may sell for an exorbitant price. Here is the roster of the 2021 honorees.

Most Valuable

Topping the list by market value is Nvidia
NVDA
, which makes chips that can handle demanding applications such as videogames and cryptocurrency mining. Its stock market value is $347 billion.

Adobe
ADBE
and Intuit
INTU
are next in size, followed by Lam Research
LRCX
and Zoetis
ZTS
.

All of these are technology stocks except for Zoetis, which makes medicines for pets and farm animals. All of them are expensive stocks, selling for 33 to 83 times the company’s per-share profits.

Most Profitable

The standard measure of a company’s profitability is return on equity. Take the company’s profit and divide it by the company’s equity or net worth (assets minus liabilities). By this measure, the most profitable company on the 2021 roster is Insperity (NSP), which provides human-resources services to small and midsize companies.

Next comes Citrix Systems
CTXS
, which makes software for remote collaboration. The pandemic has accelerated its sales growth, which was good to begin with.

BJ’s Wholesale Club
BJ
Holdings
(BJ), Tempur Sealy International (TPX) and Medifast
MED
(MED) also rank near the top.

One flaw with using return on equity as the measure is that the numbers look better when a company’s debt is high (and therefore its equity, the divisor in the equation, is low). Insperity and Citrix, for example, have very high debt.

Fastest Growing

Bio-Rad Laboratories
BIO
had the fastest earnings growth, 144%. This medical testing company got a major boost from the Covid-19 pandemic.

Fortinet
FTNT
boasted 134% earnings growth. Based in Sunnyvale, California, the company sells cybersecurity products and services. It is debt-free. But the stock is pricey.  

Also growing at lightning speed were Victory Capital Holdings (VCTR, 131%), BJ’s Wholesale Club (BJ, 73%) and Align Technology
ALGN
(57%).

Honor Roll

Here is the rest of the honor roll, listed alphabetically: Berry Global Group (BERY), Big Lots
BIG
(BIG), Celanese
CE
, Evercore
EVR
, Gener­­­­­­ac Holdings (GNRC), LGI Homes
LGIH
, LPL Financial Holdings
LPLA
and Maxim Integrated Products In
MXIM
c. (MXIM).

Also: Nexstar Media Group
NXST
, PennyMac Financial Services
PFSI
, Progressive
PGR
, Regeneron Pharmaceuticals
REGN
, SLM
SLM
, Trex Co. (TREX), Trinet Group
TNET
 and World Wrestling Entertainment (WWE). 

My Picks

Drawn from this group of excellent companies, here are three stocks that I believe are good buys now.

My favorite is LGI Homes, a homebuilder that specializes in the low-cost end of the market. Demand for homes in running high, and outstripping the supply. Many people who are reaching child-rearing age now have heavy student debt and modest incomes, so the low end of the housing market should be busy.

Progressive also looks very attractive to me. It’s a home-and-car insurance company that has been gaining market share from established companies like State Farm and Allstate
ALL
. You’ve probably seen its quirky ads on TV, but you may not know that the company has five-year earnings growth of 41%.

Regeneron Pharmaceuticals, based in Tarrytown, New York, is a biotech firm whose lead area is eye disease. It also has drugs on the market or in the pipeline for cancer, cardiovascular disease and inflammation. Cathy Woods, a money manager who has had a lot of success recently, bought the stock in December.  

This is the 19th column I’ve done on the 30-30 Club. My recommendations in previous columns have averaged a 10.2% return in 12 months. That compares to 8.3% for the Standard & Poor’s 500 Index over the same periods.

Bear in mind that my column results are hypothetical: They don’t reflect actual trades, trading costs or taxes. These results shouldn’t be confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future results.

Disclosure: I own LGI Homes and Zoetis personally and for most of my clients. My firm owns Bio-Rad and Progressive for one or more clients.

——

John Dorfman is chairman of Dorfman Value Investments LLC. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].

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