The Curious Investor

Portfolio B
Portfolio B represents my “long-term” strategy which seeks to identify companies with strong brands or reputations which are attractively valued. It’s not a strict value portfolio in the sense that I am willing to pay for growth but the growth must be corroborated by sustained earnings and cash flow performance. Some technical analysis is also used to time buys and sells. While the portfolio suffered in the aftermath of the August Subprime Correction, it performed admirably this November, maintaining its value through the correction and swiftly leading the recovery we’ve seen over the last week. I’m enthusiastic about a big December for this portfolio.

J. Crew
No industry has been hit harder with the recent repricing of risk and continued talks of an economic slow down than retail apparel. Just look at the following table of P/Es for the industry.

If not for the run in recent days, industry P/E would sit below 13! And, if not for a gap up after yet another J. Crew earnings beat a few days ago, J. Crew’s P/E would sit at a paltry 18. Lower even in the face of continually impressive earnings performance and continually improving guidance from management.

The last few months have dealt heavy losses to my J. Crew position. And, for someone who is naturally more active in his investing, it’s been difficult to stomach especially when a sale earlier in the summer could have net a very quick 40% gain. That being said, I see the potential for much more than that with the investment in J. Crew and am resolute in being patient with the stock. The growth story is there and performance has not lagged once this year. This most recent earnings beat of 42 cents per share versus 40 cents a year ago and in the face of analyst estimates of 36 cents a share is made even more impressive by the fact that it includes J. Crews loss from its new Madewell line. Breaking even would represent an addition 10% growth in earnings.

Mastercard
The funny thing about the buy of Mastercard for this portfolio is that it is seems vaguely similar to my recent technical buys of Google and Apple. In fact, the charts look eerily similar. See below, then check out the chart from my last post.

I’ve circled my buy position and as you can see, Mastercard has moved quite nicely since. The company was mis-cast as a credit crunch casualty earlier in the year and the 20% decline through July and August marked a perfect time for me to buy the stock. When I purchased, P/E was in the mid-20s and this would not represent a true value pick. But, with near term valuation on this stock’s fundamentals supporting valuation 20% higher, I felt I had found a stock with serious margin of safety as well as significant growth prospects. It just so happens that the purchase has paid off a lot more quickly than expected.

MEMC Electronic Materials
I was screaming about MEMC for weeks leading up to its most recent earnings report. Despite continued strong performance and an announced plan to aggressively pursue market share in the solar wafers industry, the stock had tread water for nearly 8 months. This resulted in some serious P/E contraction despite nearly no stock price depreciation. In technical speak, the stock’s valuation had established a very firm base value. As a tech stock with a solid core business in silicon wafers growing at modest rates (~10% projected CAGR) and a nascent solar wafer business with a projected CAGR of 30% over the next  5 years, it was my opinion that with a P/E in the mid to high 20s, MEMC was priced without heed to the explosive growth potential contained within its new solar initiative. My hunch was proven with its most recent earnings report at the end of November, announcing two huge contracts for producing silicon wafers for solar manufacturers.

After a quick gap up on the earnings announcement, heavy trading ensued as to be expected after such a long base with investors taking profits. Pricing strength held above the high of the previous base and has since moved swiftly back to 52-week highs. Is it off-to-the-races time? Time will tell.

Aetna
Aetna is currently the best performing health insurer in the industry leading its competitors in enrollment gains and earnings growth. At the time of my buy, Aetna, however, was trading at industry average valuations. Valuations which seemed to be low relative to the S&P. Well, Aetna’s has since begun to reflect its standing amongst its peers. With United Health and Well Point’s recent disappointing results, Aetna seems to have become the shining light as far as the largest health care service providers are concerned. Do I see continued expansion of its earnings multiple? Maybe. But, I would be reticent to hold on should valuation get to steep. After all, the company represents a megacap stock and sustained double-digit earnings growth is usually quite difficult.

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