2007 Portfolio B in Depth
Alright, in the same form as yesterday’s post on Portfolio A, we have a little position-by-position breakdown on Portfolio B. Once again, I feel a little weird touting the picks here in Portfolio B after the last two weeks have all but erased much of the performance. These stocks have suffered greatly from what seems to be P/E contraction in addition to the general slide. It’s worrisome, but I do believe that continued performance should continue to serve as an underpinning for the stocks in the portfolio. As mentioned, the outlook on these stocks is more long term, but I do my analysis in a short term fashion so as never to fall too in love with any pick that I make.
The Good
J. Crew (JCG, up 20.4%) – At one point, this position was up 50%. In fact, it zoomed up 50% within three months of purchasing the stock. Looking back, I may have to fashion some sort of sell strategy based on the speed of return. As, even though I believe in this stock as a long-term story, one can’t argue with taking profits on such performance. Nonetheless, I have held onto J. Crew as retail stocks have been hit with fear over a slowing economy and slowing consumer spending. J. Crew, however, has continued to outperform. Profits continue to climb hire despite heavy spending on the launch of its new brand, Madewell, which has the potential to multiply profits as the operations ramps up. After visiting Madewell’s new store in SoHo, I’m a little confused by the endeavor as the price point is very similar to J. Crew’s and the style not entirely different though definitely targeting a slightly younger, hipper demographic. I’m less bullish on the potential for Madewell to provide J. Crew with exponential growth, but remain optimistic about Mickey Drexler’s strategy for the company and its two brands. I’ll be watching closely.
Mastercard (MA, 45.4% gain) – Unfortunately, the very impressive gain on Mastercard has been halved recently. But, once again, this is a company which is miscast as a victim of the credit crunch. In fact, Mastercard merely offers payment solutions and a globally recognized brand. With spending around the world increasing, I have faith in this company’s ability to survive any downturn in consumer spending in the United States. The biggest worry here is P/E contraction as the market continues to reprice risk and lower its growth premium. Good news is that, thus far, Mastercard’s primary uptrend remains in tact. The stock, however, will require some sort of bounce within the next few days to keep its trend together.
MEMC Electronic Materials (WFR, 27% gain) – This one came out of my earnings beat strategy, but was put in Portfolio B as I ended up loving the company’s long term story. Management put together a structured and methodical plan for turning the company around several years ago. Phase I, as they described it, was very successful and they decided in early 2007 to embark on Phase II, an investment in silicon wafers for solar technology. The stock was in a long-term base despite the fact that it was clear that the plan to invest in solar wafer technology was already providing a healthy boost to profits. Well, the stock went on a tear after announcing two huge contracts to produce solar wafers last quarter and I was sitting pretty. Unfortunately, once again, repricing of risk and a decrease in the market’s willingness to pay for growth have quickly stalled the recent rally. The stock maintains its price level above its breakout level but only barely.
The Bad
Southwest Airlines (LUV, 10% loss) – Here’s a position that might have been better served in my short-term strategy as bullishness on airlines lead to a run in the sector early in the year. In the end, I didn’t realize just how much growth was priced into Southwest and bought a stock which, despite improving conditions in the airline industry, was a victim of its own success in the past year. As the company’s growth winds down, its stock is paying the price for gains in the past and P/E contraction is defeating an performance management can continue to muster out of Southwest’s mature operation.
Proshares Ultrashort Financials (SKF, 10% loss) – I mentioned yesterday that after the 2/28 sell off, I made plays in each portfolio against financials and tech thinking that I could capitalize on any continued reversal in the markets. Well, it turns out that if I had been patient and absorbed the horrible losses through the summer, I probably would have made a hell of a lot of money on this position. Unfortunately, not having done enough research, I did not invest with any conviction and quickly shied away and paid a price for my lesson.
Tiffany’s (TIF, 7.5% gain) – How could a gain be part of The Bad? Well, my Tiffany’s position was up nearly 20% prior to the sell of in February. I knew I had done my research, but my inexperience and jitters lead to me to sell to protect my profits. Within days of Tiffany’s small correction, Nelson Peltz bought a 5% stake in the company and the stock continued a summer run to all-time highs that could have netted me as much as 40% on the position. On the flip side, the stock has since been battered along with other retain stocks and is now trading at ridiculously low levels. Who knows what might have happened?
Lessons Learned
Coming from a technical analysis background, it has been difficult to fashion a strategy with a longer term outlook. Surprisingly, however, this portfolio on a position-by-position basis has performed better much better than my actively traded strategy. Maybe because I put more time into finding quality companies with sustained growth. The two most important parts of any investment.
Either way, the corrections over the last year have taught me some valuable lessons. I’ve been lucky not to hold a stock like Tiffany’s which has seen its P/E halve in the face of market trouble, but this portfolio is most certainly not skewed to low P/E, valuation stories. As the year moves forward, I am definitely going to begin to look for more value picks. One I continue to salivate over is Bank of America which I will talk about tomorrow.
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