One Person's Trash Is Another Person's Treasure Portfolio

Last November, I announced my intention to create a portfolio of 10 companies that investors had effectively thrown away and given up on, in the hope of showing that deep-value investing and contrarian thinking can actually be a successful investing method. I dubbed this the "One Person's Trash Is Another Person's Treasure" portfolio, and over a 10-week span I highlighted companies that I thought fit this bill and could drastically outperform the benchmark S&P 500 over the coming 12 months. If you're interested in the reasoning behind why I chose these companies, then I encourage you to review my synopsis of each portfolio selection:

• Exelon
• QLogic
• Dendreon
• Dell
• Staples
• Arkansas Best
• Arch Coal
• Skullcandy
• Orange
• Xerox

Now let's get to the portfolio and see how it fared this week:

Source: Yahoo! Finance, author's calculations.

This week's winner
It was a terrible week for this portfolio and the S&P 500, so I shouldn't be shocked that only one company managed to trudge higher: Orange (ORAN -0.80%). The international telecom service provider gained 5.2% after announcing a strategic partnership in Europe with Samsung. The partnership will allow Orange to scale its expertise in device management, security, and integration across Samsung's devices (primarily tablets) to help enterprise customers maximize results. With Orange heavily focused on emerging-market growth and forging partnerships in slower-growing Europe, I'd say it's on the right path.

This week's loser
Unfortunately, the path to riches took a big detour for this portfolio's worst performer, trucking company Arkansas Best (ARCB 0.79%), which lost a whopping 18.3% of its value. The impetus for the steep drop was the threat of a strike by one of the few Teamster union factions that haven't agreed to Arkansas Best's labor agreement. Should this group of union workers vote in favor of a strike, other union members would be obliged to follow -- that would cripple freight transport in the Midwest and damage Arkansas Best's reputation. Avoiding a strike is going to be paramount if the share price is to regain its lost ground. 

Also in the news...
It's a darn good thing that PC maker Dell (DELL.DL) is going private because, according to figures from Gartner, PC shipments in the third quarter declined a whopping 8.6% -- the sixth straight month of declines. If there was a bright spot it'd be that Dell managed to improve its market share by 110 basis points to 11.6%. However, having a bigger piece of a rapidly shrinking pie doesn't fix Dell's long-term growth concerns. Thankfully for shareholders like me, Dell's leveraged buyout is approved and all that's left is to collect the payout.

Continuing the string of bad news, Xerox (XRX) announced in a Securities and Exchange Commission filing earlier this week that the agency was investigating the accounting practices of its affiliated computer services division, or ACS. According to the filing, the SEC's concern involves whether Xerox should have accounted for certain revenue on a net basis as opposed to a gross basis (i.e., Xerox may have overstated revenue from its ACS division). If there is a bit of good news here as well, it's that Xerox isn't in line to be charged with any wrongdoing and any findings aren't expected to materially affect cash flow or earnings.

Finally -- and what else would you expect but more depressing news – coal miner Arch Coal (NYSE: ACI) received a credit rating downgrade from Moody's to "B3" from B2, with a negative outlook from the ratings agency. Although Moody's considers the company well-capitalized with $1.4 billion in cash, it sees few pathways to external financing should Arch Coal need it. Also, Moody's noted that Arch isn't likely to see a rebound in metallurgical coal anytime soon and projected that prices would need to rise substantially (about 25% by Moody's "guesstimates") for Arch to return to profitability. As for me, I continue to look at coal's importance for energy generation in the U.S. and Arch's focus on exports to Asia as a reason to believe in a rebound.

We can do better
This week was the perfect example of the phrase "The bigger they are, the harder they fall." This might be the worst week this portfolio has endured and it fell squarely on the drubbing Arkansas Best took. Having to this point risen as much as 150%, Arkansas Best's weighting is much higher than the remaining nine companies in this portfolio, meaning its fall was particularly harmful in spite of the S&P 500's weakness. Overall, we're back to being 8% behind the S&P 500, but the portfolio is still up overall. We're due dividends from three portfolio components this month so we do have positive things to look for. Given time and calmer nerves I do expect this portfolio to easily outlast the S&P 500, but clearly we're going to take some lumps along the way.

Check back next week for the latest update on this portfolio and its 10 components.