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 very 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 would expect to 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
With plenty of winners to choose from this week as the broad-based S&P 500 went a perfect five-for-five in the plus column, coal miner Arch Coal (NYSE: ACI) takes home the prize, with a 10.6% gain. Although no one specific news story moved Arch higher, it's been finding its footing ever since Moody's raised its outlook on the coal industry from negative to stable in August. I remain one of the few bulls still left in coal, and feel that, with the energy source providing 40% of all electrical generation in the U.S., it certainly isn't going to disappear overnight. As an added bonus, next week we get a $0.03 per share quarterly payout from Arch.

This week's loser
My favorite type of loser is one where the worst-performing stock in the portfolio still rose for the week! That's exactly what happened this week with utility stock Exelon (EXC 0.12%) adding just 0.1% from where it started. As you might expect, Exelon is a fairly defensive play, so when the market is in full-rally mode, it often lags the broader S&P 500. However, I'm going to give Exelon a pass this week, and you should, as well, because we also collected a $0.31 quarterly dividend from the company, which helped fatten up our dividends receivable! If you notice, we've more than covered the cost of our commission just through dividend income over the past seven months.

Also in the news...
The Dell's (DELL.DL) of our Lives day-time drama took an interesting turn this week, with activist investor Carl Icahn announcing that he will no longer try to stop Dell from going private, but issued one last jab at the board and Michael Dell that the offer was not in the best interests of shareholders. With a vote expected today (Sept. 12), we will soon know the fate of Dell. If you're curious as to my position, since I own shares of Dell, I voted in favor of the leveraged buyout. With shares trading about $0.03 below the offer-plus-special-dividend price, shareholder approval of the LBO is expected.

Audio-accessories specialist Skullcandy (SKUL) had a notably good week, as well, up 9.2%, following an upgrade from Raymond James to market perform from underperform. The rating change by Raymond James was done on the basis of a low valuation for Skullcandy, confidence in the new management team, and forecasts that show Skullcandy returning to profitability in 2014. I've neither added to my position, nor sold any of my own personal shares, but am eager to see how this turnaround progresses into next year.

Finally, office-supply superstore Staples (SPLS) tacked on close to 7% this week following the announcement that it was going to keep its third-quarter dividend steady at $0.12 per share. The dividend will be payable on Oct. 17 to shareholders on record as of Sept. 27. On a bigger scale, remember that we're in the bread-and-butter quarter for Staples (back-to-school), so it has a chance to really shine in its third-quarter earnings report with OfficeMax and Office Depot preparing to shutter stores for their merger.

We can do better
This doesn't happen all that often, but, in spite of the S&P 500 advancing in each of the past five days (it's actually up now for seven straight, but who's counting), this contrarian and deep-value portfolio handily outperformed this week. Huge gains this week by the likes of Orange, QLogic, and portfolio bell-cow Arkansas Best helped push this portfolio higher by close to 6%... in a week! Although we still have plenty of time to go, the underperformance gap has closed to its lowest level in months, just 2.6%. I'm confident this portfolio of contrarian and beaten-down stocks has what it takes to outperform the S&P 500 over the long run.

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