The Results of the "One Person's Trash Is Another Person's Treasure" Portfolio

Following a year of tracking 10 contrarian plays against the S&P 500, it's time to determine how we fared and what we learned from our experiment.

Feb 6, 2014 at 5:03PM

It's hard to believe a year has passed since I began my experiment known as the "One Person's Trash Is Another Person's Treasure" portfolio, picking 10 contrarian and undervalued companies and tracking their performance against the broad-based S&P 500. But alas, this experiment came to a close last Thursday.

The final tally, when all was said and done, was a respectable gain of 12.5% from our starting point, which factors in a positive gain of 1.88% from dividend payments, as well as a $100 deduction from commission costs. However, the S&P 500 delivered a near-vertical rise of 18.1% over this same time period, putting us at an underperformance of 5.6% for our one-year experiment.

Let's have a look at the best and worst performers from our experiment and examine a few lessons learned from our contrarian approach to investing.

Top performer: Arkansas Best (NASDAQ:ARCB), up 197.5%
Trucking company Arkansas Best nearly tripled during our experiment after the company ratified a long-term labor agreement with its union, ending a multiquarter stalemate, lowering its labor costs, and allowing it to remain competitive with its peers. This pick was made based on the context that the market was pricing Arkansas Best to be wiped off the map but that it was unlikely that its employees would force the company into layoffs to reduce costs when all was said and done. With rival YRC Worldwide now staring down potential liquidity concerns, it's quite possible that Arkansas Best's rally is nowhere near complete.

Worst performer: Dendreon (NASDAQ:DNDN), down 53.3%
Rule No. 1 of investing in the biotechnology sector: A drug approval does not equal success. Although cancer immunotherapies (training the body's immune system to recognize and fight back against cancer) are all the rage on Wall Street, Dendreon's advanced-stage prostate cancer vaccine, Provenge, has seen its sales stagnate because of increased competition from Johnson & Johnson's Zytiga and Medivation's Xtandi. Provenge's higher price point ($93,000) and poor launch have resulted in two rounds of restructuring, including layoffs, in an effort to reduce its cash burn rate. Provenge was recently approved in the EU, which may be critical in getting the company near breakeven, but it may also be too late for Dendreon, whose remaining pipeline is exciting few investors on the Street.

Lessons learned & observations:

  • Dividends are important: I know we emphasize the importance of dividends often here at The Motley Fool, but they are an undeniably important tool in helping us analyze the health of a business. On top of the fact that dividends helped completely pay the commission costs of this portfolio, companies that paid a consistent dividend fared far better. Arch Coal (NYSE:ACI), for instance, does pay a $0.03 quarterly stipend, but that was only after a dividend cut of 73% from $0.11 per quarter. While I still firmly believe that Arch's steps to reduce its interest payments, improve its operating efficiency, and boost its exports will make the company stronger over the long term, its dividend cut should have been a telltale warning to keep away over the near term.
  • All it takes is one or two winners: Perhaps one of the biggest takeaways from this portfolio, and investing in general, is that it's OK to be wrong a lot of the time so long as you're very, very right a few times. In this case I'd point out that without Arkansas Best and IT-specialist Xerox (NYSE:XRX), which gained 30% over the trailing year, this portfolio would have been in pretty bad shape -- down about 11%. However, all it takes are one or two home runs to completely change the score. In this case, Xerox's health services, which should see a notable uptick as Obamacare continues to be implemented, and Arkansas Best's labor deal were the catalysts that led both stocks to big gains -- and pulled this portfolio to a 12.5% gain.
  • Timing our experiment is (small "F") foolish: Sure, there had to be some measure of success to determine whether or not picking seemingly undervalued and contrarian stocks outperformed or underperformed the S&P 500, but arbitrarily choosing a year as my time frame wasn't a very good idea. Partitioning your investments into a particular time frame is never a good idea, and a year is far too short of a time frame, in hindsight, to determine outperformance or underperformance, as we're focused on long-term investing.
  • This was an unprecedented year: Managing a portfolio of contrarian plays is difficult when the entire market was aided by an unprecedented economic stimulus known as QE3 that spanned the course of the year. Often, when the S&P 500 demonstrated even the slightest bit of weakness, this portfolio outperformed; however, with the Fed injecting $85 billion through long-term U.S. Treasury and mortgage-backed security purchases on a monthly basis, it made swimming against the tide practically impossible.
  • Market cyclicality was on full display: One of the more interesting observations of 2013 was just how obvious the rotation was out of defensive stocks and into higher growth and riskier names in the technology and biotechnology sectors. My first selection for the portfolio was actually electric utility Exelon (NYSE:EXC) because I personally figured it had a minimal chance of falling in 2013. That prediction turned out to be all wet by year's end, with Exelon dipping about 10%. Exelon has struggled with higher nuclear costs, and it simply wasn't a popular company in 2013 with investors chasing growth in a rapidly advancing market.

Ultimately, this was a rewarding and thought-provoking year. Although I am still tracking my Basic Needs portfolio on a weekly basis, I will certainly entertain other tracking portfolio ideas to discover new ways to beat the market.

Here's to another successful year -- nay, decade -- of investing!

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of and recommends Johnson & Johnson. It also recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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