In November 2012, 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 my choices, then I encourage you to review my synopsis of each portfolio selection:
- Exelon
- QLogic
- Dendreon
- Dell/American Eagle Outfitters
- Staples
- Arkansas Best
- Arch Coal
- Skullcandy
- Orange
- Xerox
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 |
$848.07 |
(14.3%) |
|
QLogic |
$11.46 |
86.39 |
$1,047.05 |
5.8% |
|
Dendreon |
$5.97 |
165.82 |
$552.18 |
(44.2%) |
|
American Eagle Outfitters |
$15.49 |
63.91 |
$954.82 |
(3.6%) |
|
Staples |
$13.48 |
73.44 |
$1,062.68 |
7.3% |
|
Arkansas Best |
$10.83 |
91.41 |
$3,188.38 |
222.1% |
|
Arch Coal |
$7.03 |
140.83 |
$616.84 |
(37.7%) |
|
Skullcandy |
$6.71 |
147.54 |
$1,100.65 |
11.2% |
|
Orange |
$11.64 |
85.05 |
$1,116.71 |
12.8% |
|
Xerox |
$8.16 |
121.32 |
$1,503.15 |
51.8% |
|
Cash |
$28.28 | |||
|
Dividends receivable |
$180.96 | |||
|
Total commission |
($100.00) | |||
|
Original investment |
$10,000.00 | |||
|
Total portfolio value |
$12,199.77 |
22% | ||
|
S&P 500 performance |
23.1% | |||
|
Performance relative to S&P 500 |
(1.1%) |
Source: Yahoo! Finance, author's calculations. American Eagle Outfitters replaced Dell, which was taken private in October.
This week's winner
I haven't been able to say this much over the past year, but leading the pack this week with a 16.8% gain is biopharmaceutical company Dendreon (NASDAQ: DNDN) after the developer of metastatic prostate cancer drug Provenge reported positive preliminary fourth-quarter guidance. Dendreon announced on Monday that it anticipates reporting revenue of $74.8 million in the fourth quarter, a 10.1% sequential increase from the third quarter but down 12% from the year-ago period. Between Dendreon's second major restructuring in a year and its European approval of Provenge, the hope from shareholders is that Dendreon's cash burn will be reduced dramatically. It's definitely a nice start to the new year, but investors have seen this before and are probably going to be more skeptical of Dendreon moving forward until it actually delivers on its promise of a smaller operating loss.
This week's loser
On the flip side, consumer office supply and electronics retailer Staples (SPLS +0.00%) had a rough week, down 7.3%, despite a lack of company news and in spite of the fact that we received a $0.12 per share quarterly payment from the company today (which has been included in our dividends receivable column above). One factor that may have contributed to Staples' weakness is the Consumer Electronics Show last week, which only further highlights how far Staples' brick-and-mortar locations are out of touch with reality. Staples is, thankfully, now the No. 2 global online retailing brand behind Amazon.com, so there is hope that a slimming-down of its square footage and a push of its online presence will boost sales, but it certainly won't be an overnight process.
Also in the news...
American Eagle Outfitters (AEO 4.50%) actually fell less than 1% this week following mixed commentary made at the annual ICR XChange conference. According to American Eagle, it anticipates closing 25 to 50 stores this year and will likely deliver a margin compression totaling 500 basis points. But American Eagle also anticipates meeting its previously released January expectations and is working with a much tighter price-to-value relationship that it feels it lost in 2013. I've long felt that no teen retailer has done a better job of historically controlling its inventory than American Eagle Outfitters and would look for a dramatic improvement in 2014 in spite of its tepid guidance.
The news for Xerox (XRX +0.00%) and Arkansas Best (ABFS 6.55%), on the other hand, happened to be more of the "indirect" kind.
Xerox, for example, rose to a new 52-week high on the week after Obamacare enrollment figures were released from the Department of Health and Human Services. Although just 2.15 million people have signed up thus far, the number of enrollees surged in December, leading to hope that the target of 7 million signups by the March 31 cutoff date will be reached. Furthermore, approximately 4 million people have thus far been found eligible for Medicaid, and Xerox is a Medicare payment processor in California -- the nation's leading state for enrollments. As Obamacare gains traction, the need for Xerox's recurring services should only increase.
For trucking company Arkansas Best, its gain was YRC Worldwide's pain. Late last week shares of Arkansas Best rival YRC Worldwide took a hit as 61% of YRC's Teamsters union voted against a contract extension that would have reduced wages by 15% into 2019. Despite diluting shareholders into oblivion a few years ago, YRC may still not avoid bankruptcy if it can't restructure its wage contracts. This is great news for Arkansas Best, which can use YRC's weakness as a reason to pick up and retain new clients.
We can do better
Although the S&P 500 romped to another new all-time high, this portfolio of contrarian and deeply discounted plays held fast and actually outperformed the iconic index thanks to big gains from Arkansas Best, Xerox, and Dendreon. This year-long experiment is down to just a handful of weeks now, but we've closed the gap to roughly 1% behind the S&P 500. When all is said and done, I believe we have the momentum to outperform the index.
Check back next week for the latest update on this portfolio and its 10 components.
