Lots to catch up on. First another monthly stock portfolio came to a close on Friday. The August 30th, 2007 portfolio was pretty darned bad. It was down an average of 12% versus a drop of 7.8% for the Russell 3000. That makes it the 12th straight portfolio to lose to the benchmark. Overall for my 20 closed portfolios, the benchmark has done better 13 times. For the 20 closed portfolios, the average annual gain has been 3.5% (that passport savings account is looking better) while the benchmark has gained 5.5%. The upcoming 6 portfolios are also trailing, so it has been a bleak stretch. As a reminder, my tracking portfolios are the 50 stocks greater than 100m market cap.
As is generally the case, there has been a lot of variability. MVL, PBT, EGY, TRLG & VPHM were the big winners, all up over 50% with EGY up over 100%! CHCG, FTO GLBL, HOC, HBMFF, PNCL, RDYN, TZOO and WON were the big losers, each down over 50%. RDYN was the biggest loser, down over 81%. Again, this illustrates why results of people using MFI vary so much in the short term. The returns of individual stocks vary greatly. But if you buy the whole portfolio, which is how JG measured the method as superior, it hasn’t been working.
There is silver lining. The 5 newest portfolios, starting with March 24th, 2008 are all ahead of the benchmarks. In statistics we check the “fit” of data by looking for random patterns of above and below the actual data. In the MFI method, it seems very likely to me that the likelihood of beating the benchmarks is not random, but rather has runs, both good and bad. Hopefully we’re on the cusp of a nice long “good” run.
My overall results continue to frankly suck. It has been a bad year. The refiners that I picked sank, IAR was crushed, CHCG has been a disaster. Even sold stocks like TGIS, USHS and NOOF tanked in 2008. Wait, I forgot ODP (actually bought by JG) and LCAV. It has really been a bad year. What lessons can be gleaned from these stocks?
IAR – had too much debt. With slowing economy amount of $ to cover debt costs left little for stock holders and dividends.
CHCG – Chinese companies are simply out of favor. They have had hot/cold numbers, though in total they’re making decent money for the price. Limited visibility on
TGIS – smaller company with many revenues coming from govt. Too much reliance on single customer.
USHS – housing slump crushed earnings.
NOOF – smaller company with unsteady cash flow. Just one project being delayed cost $.
ODP – general business slowdown hurt company. Also all retailers have in general been hurt.
LCAV – discretionary purchase such as laser surgery in troubled times drop sharply.
Recently, I have been steadily moving up. I am 11% off my lows for the year, but I have a long ways to go to even get to break-even. I am still convinced the method has merits, but I am obviously (1) not a very good stock picker or (2) incredibly unlucky. Honestly, it is probably (1), I do think I have a tendency to fall into value traps. Hopefully I am learning as I go.
One change for me is moving to tranches of 5 stocks every month. I am hoping the law of larger numbers helps me right the ship again. I am not trying to get rich using this method, but rather have steady performance. My current tranches are:
May: ACN, AEO, RHI, MHP and TRA. Overall up 8.5%
June: KG, FTO, LRCX, HURC and VALU. Overall up 0.5%
July: COH, NOK, QXM, NVDA and FTO. Overall up 1.6%
August: BOLT, NOK, CAST, BR and HURC. Overall up 0.3%.
Since I am buying smaller $ per stock, I do allow myself to own a stock 2x, as I have done for NOK and FTO. I am already starting to think towards September. NWS, BBSI and KHD are on my early watch list.
I think one point that JG doesn’t touch upon much in his book is the differences between smaller/micro cap stocks and larger stocks. He paints everything with the same brush, which I am not sure is fair. I had never bought these small cap stocks before MFI and it is fair to state that has been an expensive lesson. Smaller cap stocks can really get crushed as they may have a large reliance on a single customer or single product. Also, smaller cap stocks are a little more likely to show up on the list because of an unusual event, such as a one time windfall, that people may not fully understand. Finally, some smaller cap stocks are very thinly traded which makes buying them and selling them difficult. I have held VALU for a 2nd year as I frankly had trouble selling as the spread between the bid and ask is often so broad.
Here are my current holdings and whether I rank each stock a 1 – would buy more, 2- would buy more if price dropped, 3- would sell if price went up or 4- would sell today if I could.
COH (1) – I found it stunning they increased revenues 20% in this economy. They must have the secret sauce.
NOK (1) – Jubak likes them and that is good enough for me.
BOLT (1) – just reported a strong quarter and said they think 2009 looks strong. Not many companies are saying that, yet BOLT is cheap.
CHCG (1) – I have lost a fair chunk of change here as well, but I (foolishly?) think this stock has decent prospects.
KSW (1) – Don’t know how this stock is under $5. They have buckets of cash and are making buckets more.
PRLS (2) – still trading well less than total cash. Seems like something could happen to make them pop (like a buyout or them making money again).
TRID (2) – in product replacement mode, will likely lose money over next 12 months. Does have cash though, so should be near bottom.
HBMFF (2) – directly correlated with the price of zinc.
ELOS (2) – they have had two straight strong quarters since I bought them, yet the stock price has barely moved.
MRX (2) – see ELOS.
BBSI (2) – a solid company with great fundamentals/balance sheet. Decent dividend. Might be able to take advantage of downturn to gobble up competitors.
BID (2) – part of a duopoly. Auction business has held up decently despite economic downturn.
LRCX (2) – this semi equipment company seems SO cheap.
HURC (2) – I see they’re up today, I think the market decided that companies growing their earnings should not be 30% down on the year.
VALU (2) – sleepy company, but increasing dividend and making money. Hard to complain too much compared to some of my other choices.
BR (2) – nice steady niche company that spun off from ADP. A pick straight from JG’s first and 2nd books!
ACN (2) – well-managed company. Past several quarters have really been good.
LCAV (3) – last quarter was god-awful. Little hope of improvement in near-term until economy picks up. Bad news does seem priced in.
HOC (3) – I think I have had it with refiners. If gas consumption continues to drop, it’ll be hard for them to make a decent profit.
ODP (3) – like many of my MFI stocks, forward prospects are not so good. A lesson that trailing 12 months earnings are not always a great proxy for the future.
IAR (3) – a complete disaster. Possibly my worst stock of all time, including some internet go-go bubble babies.
THO (3) – I thought they were best of breed and had demographics going for them. I now think that is trumped by higher gas prices and raw material costs.
RHI (3) – staffing company. Seems to be trekking along ok. Risk is that unemployment fires up.
TRA (3) – fertilizer company. I have concerns that farmers are being squeezed by high costs. On other hand, lower NG costs may increase margins.
MHP (3) – I think companies are going to pare down the number of rating agencies they use. Could hurt MHP.
KG (3) – I have done well with King due to good timing, but I think future prospects are dim.
FTO (3) – see HOC. Though I do think FTO is best of breed for independent refiners.
NVDA (3) – in a battle with AMD. Hopefully it won’t be too bloody.
AEO (4) – maybe my least favorite stock for their prospects. Retail is hurting and AEO seems to be losing market share to companies like ARO.
Enough babbling. Time to say "good night"
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