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

By Sean Williams - Dec 12, 2013 at 4:48PM

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A yearlong exercise intent on proving that value and contrarian investing can be incredibly successful.

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:

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

Company

Cost Basis

Shares

Total Value

Return

Exelon

$31.25

31.68

$887.36

(10.4%)

QLogic

$11.46

86.39

$975.34

(1.5%)

Dendreon

$5.97

165.82

$509.07

(48.6%)

American Eagle Outfitters

$15.49

63.91

$916.47

(7.4%)

Staples

$13.48

73.44

$1,166.23

17.8%

Arkansas Best

$10.83

91.41

$2,945.23

197.5%

Arch Coal

$7.03

140.83

$606.98

(38.7%)

Skullcandy

$6.71

147.54

$805.57

(18.6%)

Orange

$11.64

85.05

$1,018.05

2.8%

Xerox

$8.16

121.32

$1,353.93

36.8%

Cash

   

$28.28

 

Dividends receivable

   

$159.94

 

Total commission

   

($100.00)

 

Original investment

   

$10,000.00

 

Total portfolio value

   

$11,372.45

13.7%

S&P 500 performance

     

18.7%

Performance relative to S&P 500

     

(5%)

Source: Yahoo! Finance, author's calculations, American Eagle Outfitters replaced Dell, which was taken private in October.

This week's winner
Topping the list of gainers this week was office supply superstore Staples (SPLS), which added 3.1% following a buy rating reiteration from research firm Argus on Monday. Although Argus maintained its rating, it did boost its price target on the company to $18 from $17 with the expectation that tight cost controls and a growing online business should provide a lift to its bottom line. With Office Depot and OfficeMax in the thick of their downsizing, there's real potential for Staples to pick up market share due to displaced domestic customers. Staples has a shot at really surprising investors in 2014 and beyond.

This week's loser
On the other end of the spectrum, we have teen retailer American Eagle Outfitters (AEO -0.82%), which fell 11.1% for the week, causing retail investors to play ostrich after it reported its third-quarter earnings results and provided fourth-quarter guidance. For the quarter, profits fell 54% to just $0.19 per share as same-store sales shrank 5%. What really worried investors was American Eagle's fourth-quarter EPS forecast of $0.26-$0.30 when $0.39 was projected by Wall Street. It's no secret that teen retailers are struggling to attract customers at the moment, but with superior inventory control habits, the perfect price point relative to its peers, a handsome dividend, and a rapidly growing direct-to-consumer segment, I'm not too concerned about American Eagle Outfitters' guidance.

Also in the news...
There's little I enjoy more than sitting back, relaxing, and letting the dividends flow right in. This week, we received our $0.31 quarterly payment from electric utility Exelon (EXC -0.42%), which has been added to the dividends receivable column above. As you'll note, we've basically earned a 1.6% yield on this portfolio of companies thus far, which has more than taken care of our commission costs. As for Exelon, it finally edged up as defensive plays and necessity stocks (people need electricity regardless of how well the economy is performing) suddenly became must-own hedges.

Despite ending the week lower, trucking company Arkansas Best (ARCB 2.95%) received an upgrade late last week from JPMorgan Chase, which took the company to neutral from underweight and boosted its price target to $34 from $28. Last week, Arkansas Best announced plans to close 22 terminals, which will save it $15 million to $25 million annually. When combined with its reduced labor costs as a direct result of its multiyear labor agreement ratification Arkansas Best is sitting in the driver's seat when it comes to competing on costs with its peers.

Finally, coal miner Arch Coal (NYSE: ACI) on Tuesday announced that longwall mining at its Leer mine in West Virginia had begun. Arch notes that the Leer Mining Complex is anticipated to produce more than 3 million tons of metallurgical coal -- the type used in the steelmaking process -- on an annual basis. Coal prices certainly aren't anywhere near their highs, but it's nonetheless good to see revenue being generated after more than $400 million invested in developments in the Leer mine.

We can do better
It was a bit of a rough week with portfolio outperformer Arkansas Best dropping by $2 and many of the tech names down each and every day. However, I still remain confident that any sort of sizable retracement in the market is going to work in favor of this portfolio, which is comprised of predominantly undervalued and contrarian plays.

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

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Stocks Mentioned

ArcBest Corporation Stock Quote
ArcBest Corporation
ARCB
$68.75 (2.95%) $1.97
American Eagle Outfitters, Inc. Stock Quote
American Eagle Outfitters, Inc.
AEO
$13.32 (-0.82%) $0.11
Exelon Corporation Stock Quote
Exelon Corporation
EXC
$47.15 (-0.42%) $0.20
Staples, Inc. Stock Quote
Staples, Inc.
SPLS

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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