This article is part of our Rising Star Portfolios series.
Building a list of companies you'd like to own but don't yet for one reason or another is a key part of investing. Maybe the price isn't right, maybe you haven't looked into it deeply enough, whatever. Using a watchlist keeps these companies in front of you, so you can invest in them when the time is right.
Three companies that recently came across my radar screen while looking for the next company to add to my Messed-Up Expectations (MUE) portfolio -- which invests in companies that the market is not expecting much from at all -- were Noranda Aluminum Holdings (NYSE: NOR ) , NRG Energy (NYSE: NRG ) , and Western Refining (NYSE: WNR ) .
While Alcoa (NYSE: AA ) is a much bigger aluminum company, Noranda focuses in a couple of niche markets, producing foil and stock for containers like pie tins as well as heat exchanger fins. Alcoa's food packaging is focused on cans and bottles, and its construction line focuses on panels for building sides. Regarding Noranda, though, I learned that delays in research can be beneficial.
I was in the middle of looking deeper into Noranda, learning about what it does and how it makes money, when I had to go out of town suddenly for a couple of weeks. After returning, Noranda reported earnings, and I quickly discovered that of the $130 million in trailing 12-month free cash flow the company had made in the previous period, $106 million had been cash settlements received from aluminum price hedging a year earlier. Not really repeatable, so when that's dropped out and the most recent quarter is included, the new TTM FCF amount was $68 million. That changed the priced-in expectations enough to no longer make it attractive at current prices.
Of course, the share price could drop or it could remain the same while FCF increases, in which case I would be interested again, so I'm adding it to my watchlist.
At current prices, independent electricity producer NRG is actually expected to shrink FCF over the next 10 years. What had appealed to me, however, was its planned expansion of a nuclear power plant it ran in Texas. However, that was essentially nixed shortly after the Fukushima Daiichi disaster. Management decided that the regulatory environment in the U.S. would become much more difficult to work in and pulled all financial support from the development. With this change, I felt that the answer to the question "Am I convinced that this pick has a good chance to beat the market?" was no longer an unequivocal "yes."
I'll keep my eye on the company, however, and follow developments. Business situations change all the time, as NRG illustrates, and it could reach the point where a "yes" answer is the one to give.
Sometimes the best stock to buy is one you already own. Yesterday, I added to the portfolio's position in Western Refining to continue to take advantage of the Brent/WTI crude oil spread. Western Refining uses the cheaper WTI oil, which lowers its costs relative to Valero (NYSE: VLO ) , the largest independent domestic refiner.
This purchase is made just a few days ahead of its next earnings release date, but that's fine with me. Even if Western Refining disappoints the market, this is a longer-term investment for the portfolio.
Come join me over on the Messed-Up Expectations portfolio discussion board to talk over these and other companies hitting our radars.
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