Gimme My Money!

In my continuing effort to see if I can win the half-million-dollar prize CNBC is giving away in its stock-picking challenge, I'm following the advice my Foolish colleague Bill Barker laid out a few weeks ago for a 10-step strategy to win the two-month-long game.

We all basically agree that Bill's plan is an admittedly risky approach to investing -- highly concentrated portfolios of very small-cap stocks poised to announce earnings so as to capture their volatility -- so we wouldn't necessarily want to invest this way in real life. However, for a game giving away some big bucks, it's worth a try, and I figured I'd emulate Bill's ideas as closely as I could.

Don't try this at home
As I originally noted, I screened for the smallest-cap companies permissible ($500 million or more), with stock trading at less than $10 a share and showing relatively high levels of short interest. Bill suggested delving into biotechs, since they often showed the greatest price fluctuations, but I opted to find companies where they lay.

So how am I doing? Well, it was a rough week again last week. My five virtual portfolios now have an average return of minus 5.5%, ranging from a gain of 3.2% in Portfolio 1 (which tumbled this week as ethanol producer VeraSun Energy (NYSE: VSE) was downgraded on corn supply concerns) to a loss of 21.7% in Portfolio 3 (which was dragged down by Citizens Republic Bancorp (Nasdaq: CRBC), which was forced to raise $200 million to bolster its balance sheet). This week, I'll look at another of my losing portfolios, Portfolio No. 4, which has a return so far of minus 1.7% (slightly higher than the stock returns in the chart below because it includes some cash holdings).

Stock	Purchase Price	Price 6/6/08	% Chg.
Advance America (NYSE: AEA)	$8.74	$5.63	(35.58%)
Applied Micro Circuits (Nasdaq: AMCC)	$8.86	$9.20	3.84%
Arris Group (Nasdaq: ARRS)	$8.00	$9.58	19.75%
ev3 (Nasdaq: EVVV)	$9.80	$10.25	4.59%
Average Return			(1.85%)

While I'm still unsure of just how many players there are, that average return -- while not the worst -- puts me at No. 547,492 on the list. The portfolio's value of $983,340.52 still puts me well behind the top players, where there seems to have been a lot of movement lately.

Not exactly energized
The winning card in this hand has been cable equipment provider Arris Group, though it hasn’t been enough to offset the losses experienced by payday lender Advance America. While Arris actually saw its shares drop last week when it, too, was downgraded by an analyst (though he thought the business was stable), Advance America continued to suffer along with all aspects of the subprime lending industry. Just last week, CompuCredit (Nasdaq: CCRT), which markets credit cards to consumers at the low end of the FICO range, was hit with charges of fraud, though they seem a bit farfetched. Moreover, analysts think payday lending in general is vulnerable as state legislators start moving to cap interest rates below any reasonable profit level.

Investors are taking the warning: Despite what should be good economic times for such businesses (as economies worsen, the need for such services grows) -- this time may just be different. That's what CAPS investor shackindawoods believes, though he doesn't much like the industry to begin with:

Excellent stock to short. We wont even get into the sleeze/slime factor, the conventional wisdom that a falling economy will help these businesses is dead wrong this time. THIS time around customers simply WONT HAVE checks to cash and will walk away from any loans just like home owners are walking from mortgages. Also, belt-tightening severity will soon reach that tipping point where cost of the service is too high. This will be [the] next financial sector domino. ... 

Movin' on up
A lot can happen in a week's time. Check back next week to see which of my portfolios has made the biggest move in that time span, and which may yet catapult me to the lead.

Previous portfolio updates:

• The 10-step plan
• We hatch our plot to capture the gold!
• Week 2's lowdown on the portfolio down below
• Week 3 and a look at the top of the heap
• Week 4 slips into a little red number