A year into my second tussle with Mr. Market -- a three-year contest to see who's better at generating returns for investors -- my five-stock tech portfolio, which I call the Big Idea Portfolio for how these businesses are leading and profiting from big industry shifts, is crushing the market by double digits.
Happy New Year to me. And to you.
You could call me lucky. Short-term returns tend to be more about timing and chance than reasoned analysis and valuation discipline. Catalysts also play a role.
Nevertheless, we've seen this before: After year one of my first throwdown with the index, I led by almost 16% on average despite a negative total return (the market had collapsed nearly 18% as the Great Recession loomed). Two years later I'd end up winning the contest while outperforming by 13.35%. History is no perfect indicator, of course, but the similarities are striking.
This time, I'm winning because of a shift in temperament: investors and consumers appear ready to concede that the traditional PC-software model, while not dead, is fading, and that new market leaders have established franchises that are anything but fly-by-night.
Count Rackspace Hosting (RAX), up more than 80% since tracking began, and salesforce.com (CRM -1.10%), up more than 65%, among these new leaders. Rising adoption of cloud computing drove gains for both companies, and more could be on the way in 2013. Gartner expects overall software spending to rise 6.4% this year, while its peers at Forrester Research predict that the market for software delivered as a service (i.e., via the Web) will rise 25% in 2013, accelerating to 27% the year following.
What's the Big Idea now?
Cloud computing growth led to an imperfect rally in 2012. In March, my five tech stocks were outperforming the benchmark by an average of 17.4%. Four months later, I'd given away all that and more, trailing the S&P by about a percentage point. I'd make up more than 14 points the very next month on my way to a market-thumping year. How's that for volatility?
Holding helped me outperform during an outstanding year for the markets, going by historical standards. Rather than the more pedestrian 7% stocks tend to return in an average year, the iShares Russell 2000 Index (IWM -0.61%) rose 18.19% from Jan. 6, 2012, the day I started tracking this portfolio, according to Yahoo! Finance. And that includes dividends and returns of capital.
The Nasdaq-tracking Fidelity Nasdaq Composite Index (ONEQ -0.74%) ETF rose 16.73% over the same period, while the SPDR Dow Jones Industrial Average (DIA -0.92%) tracking index improved 10.97%, according to Yahoo! Finance data. Here's a closer look at where I stood compared with the S&P 500 SPDR through Thursday's close:
| Company | Starting Price* | Recent Price | Total Return |
|---|---|---|---|
|
Apple (AAPL 0.52%) |
$418.68** |
$542.10 |
29.5% |
|
Google (GOOGL -1.97%) |
$650.09 |
$723.67 |
11.3% |
|
Rackspace Hosting |
$41.65 |
$75.38 |
80.9% |
|
Riverbed Technology (RVBD.DL) |
$25.95 |
$20.60 |
(20.6%) |
|
Salesforce.com |
$100.93 |
$168.71 |
67.2% |
|
AVERAGE RETURN |
-- |
-- |
33.66% |
|
S&P 500 SPDR |
$124.94** |
$145.73 |
16.64% |
| DIFFERENCE |
-- |
-- |
17.02% |
Source: Yahoo! Finance.
*Tracking began at market close on Jan. 6, 2012.
**Adjusted for dividends and other returns of capital.</h4>
The year of data
- Investors finally woke up to the truth that Google is perhaps the world's greatest data company, while federal investigators decided against bringing an antitrust action against the search king. You can bet that Steve Ballmer isn't happy about this, especially now that the Chrome browser is gaining steam worldwide.
- Carl Icahn turned his sights on Netflix (NFLX 1.74%) months before the once-beleaguered streaming video supplier completed a winning content deal with Walt Disney (DIS -1.01%). Most damning: The House of Mouse is one-third owner of Netflix rival Hulu.
- Riverbed made a $1 billion bid for OPNET, a price the market deemed too high at the time. Never mind that the two companies' products are highly complementary and that Riverbed is in the midst of what appears to be a successful effort to diversify its core business.
- Facebook (META -10.56%) suffered a rough debut in May, only to rally nicely as the year ended. Thank Gifts for that. The social network's e-commerce experiment appears to be a success so far, a precursor to dozens of new ways for Facebook to monetize data.
- And finally, Apple introduced not only the iPhone 5 but also the iPad Mini as the market yawned. The Mac maker suffers from having instilled hysteria in prior product launches.
Color me bullish anyway. The iPad Mini I received as a Christmas gift induced more than a few oohs and aahs when I brought it out in public. And justifiably so, I think. The device is just large enough to deliver the great video experience of its larger cousin yet small enough to fit in a pocket and hold in one hand. What Research In Motion's (BB -3.14%) PlayBook should have been, the Mini is.
All of which is to say that I'm as confident as ever in my tech portfolio as we head into year two of this three-year throwdown. What's your take? Would you swap out any of my stocks for an alternative? What would it be and why? Please weigh in using the comments box below.
