The Bunny Portfolio, a hypothetical investment strategy now in its 24th year, seeks to capitalize on the market’s undervaluation of companies experiencing rapid earnings growth. The portfolio’s core principle rests on identifying stocks exhibiting a historical five-year earnings growth rate of 25% or more, while simultaneously trading at a price-to-earnings ratio of 12 or less. This combination targets companies whose growth potential may be overlooked or dismissed by the broader market, potentially offering significant upside. The portfolio’s name, a playful nod to the Energizer Bunny, reflects the strategy’s focus on companies that continue to outperform expectations, delivering sustained growth even when market sentiment suggests otherwise. This approach relies on a purely quantitative selection process, eliminating subjective judgment and ensuring objectivity in stock selection. Each year, the portfolio comprises ten stocks, prioritizing the fastest-growing and most undervalued companies meeting the established criteria.
Over its 23-year history, the Bunny Portfolio has demonstrated impressive performance, averaging a 15.5% annual return. This performance significantly surpasses the 10.9% return achieved by the S&P 500 Total Return Index over the same period. While this historical outperformance is encouraging, it’s crucial to acknowledge the hypothetical nature of the Bunny Portfolio’s results and the inherent limitations of past performance as a predictor of future returns. It is also important to note that the Bunny Portfolio has not consistently outperformed the S&P 500, with only 11 out of 23 portfolios beating the benchmark index. This underscores the inherent volatility and risk associated with any investment strategy, including one focused on high-growth, undervalued stocks. The strategy’s success relies on the market eventually recognizing the true value of these companies, which is not always guaranteed.
The 24th iteration of the Bunny Portfolio includes a diverse range of companies spanning various sectors. A-Mark Precious Metals (AMRK), a wholesaler of precious metals, boasts a remarkable five-year earnings growth exceeding 63% annually, despite a recent profit decline. Academy Sports and Outdoors (ASO), a returning member, continues to impress with an average annual earnings growth of 86% over the past five years. Atkore (ATKR), a manufacturer of electrical and industrial products, trades at a compelling price-to-earnings ratio of seven. Cal-Maine Foods (CALM), the largest U.S. egg producer, also returns to the portfolio, offering a combination of consistent profitability, dividend payments, and a debt-free balance sheet.
Conduent (CNDT), a provider of digital payment services, represents a more contrarian pick, given its underperformance over the past five years. Despite this, the limited analyst coverage available suggests a positive outlook for the company. Crescent Capital BDC (CCAP), a business development company providing financing to mid-sized businesses, has consistently grown profits at a rate exceeding 30% annually. Crocs (CROX), another returning member, has achieved a remarkable turnaround, transitioning from losses to six consecutive years of profitability, and trades at an attractive price-to-earnings ratio of eight.
First Citizens BancShares (FCNCB), a regional bank with a long history of profitability, rounds out the financial sector representation in the portfolio. Forestar Group (FOR), a homebuilder with a significant stake held by D.R. Horton, benefits from the strength of the housing market and trades at a low price-to-earnings multiple. Finally, Merchants Bancorp (MBIN), another regional bank, has seen its stock price triple over the past five years while maintaining a price-to-earnings ratio below seven and consistently exceeding profitability benchmarks.
The 23rd Bunny Portfolio, while delivering a 15.5% return, underperformed the S&P 500’s impressive 33.6% gain. This highlights the inherent volatility of the strategy and the potential for short-term underperformance even when the underlying investment philosophy remains sound. Cal-Maine Foods emerged as the top performer, delivering a remarkable 104% return including dividends, while Albemarle Corp. (ALB) experienced a decline of 16%. These contrasting outcomes underscore the importance of diversification within the portfolio and the inherent risks associated with individual stock selections.
The Bunny Portfolio’s long-term success hinges on the market’s eventual recognition of the intrinsic value of the selected companies. While the strategy has historically delivered impressive returns, it’s essential to approach it with a long-term perspective and an understanding of the potential for short-term fluctuations. The portfolio’s focus on high-growth, undervalued stocks carries inherent risks, and past performance, while encouraging, is not a guarantee of future success. The disclosure of personal and client holdings in Cal-Maine Foods and Merchants Bancorp provides transparency regarding potential conflicts of interest and underscores the importance of independent due diligence for any investor considering replicating the Bunny Portfolio strategy.
