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 |
$891.16 |
(10%) |
|
QLogic |
$11.46 |
86.39 |
$998.67 |
0.9% |
|
Dendreon |
$5.97 |
165.82 |
$499.12 |
(49.6%) |
|
American Eagle Outfitters |
$15.49 |
63.91 |
$914.55 |
(7.6%) |
|
Staples |
$13.48 |
73.44 |
$1,015.68 |
2.6% |
|
Arkansas Best |
$10.83 |
91.41 |
$3,254.20 |
228.7% |
|
Arch Coal |
$7.03 |
140.83 |
$594.30 |
(40%) |
|
Skullcandy |
$6.71 |
147.54 |
$1,099.17 |
11% |
|
Orange |
$11.64 |
85.05 |
$1,085.24 |
9.6% |
|
Xerox |
$8.16 |
121.32 |
$1,463.12 |
47.8% |
|
Cash |
$28.28 | |||
|
Dividends receivable |
$180.96 | |||
|
Total commission |
($100.00) | |||
|
Original investment |
$10,000.00 | |||
|
Total portfolio value |
$12,024.45 |
20.2% | ||
|
S&P 500 performance |
22.8% | |||
|
Performance relative to S&P 500 |
(2.6%) |
Source: Yahoo Finance, author's calculations. American Eagle Outfitters replaced Dell, which was taken private in October.
This week's winner
Leading this portfolio of contrarian and deeply discounted stocks to the upside this week was chronic underperforming electric utility Exelon (EXC +0.29%), which tacked on 5.1%. With the S&P 500 primarily stuck within a limited trading range and speculation building among traders that a correction is long overdue, investors began moving back into defense industries like electric utilities. Exelon still has work to do in promoting alternative energy within its portfolio and figuring out a way to lower its nuclear costs, but at a fraction above its book value and just 12 times forward earnings, I believe it's worth the look here.
This week's loser
At the other end of the spectrum was none other than Dendreon (NASDAQ: DNDN), which has spent more weeks in this column than another other portfolio component. Shares dipped 9.6% for the week despite a lack of company-specific news, but they had rallied strongly over the previous week. This will be the make-or-break year for Dendreon: Its metastatic prostate cancer immunotherapy, Provenge, was approved in Europe last year, and the company will be completing its second round of steep cost cuts later this year. If Dendreon doesn't see a notable improvement in sales and shrinkage of its losses by year's end, it could face a very rocky road ahead.
Also in the news
Perhaps nothing was more shocking than yesterday's announcement from teen retailer American Eagle Outfitters (AEO +0.71%) that CEO Robert Hanson was stepping down and that executive chairman Jay Schottenstein would serve as interim CEO until a new chief executive is named. Hanson served as the head of American Eagle for less than two years, but his departure certainly comes as a surprise, given that the company has historically outperformed its peers on inventory management and sales growth. While I admit to being a bit taken aback by Hanson's departure, I also feel that American Eagle's advantages extend beyond the CEO chair. Unless we start witnessing mass departures of American Eagle Outfitters executives, I'm going to stand by my assertion that this is the best value in the teen retailing space and the retailer most likely to lead its industry out of the latest funk.
Coal miner Arch Coal (NYSE: ACI) continued a string of disappointing news this week, forecasting weak fourth-quarter sales as shipments from its Power River Basin region in Wyoming fell 15% from the third-quarter due to rail delays. The company also had to deal with challenging geological conditions that caused production at its Mountain Laurel mine in West Virginia to dip by 40%. This lower production also caused its thermal production amounts to drop below its previously forecast range. Arch Coal remains a work in progress as it focuses on boosting international exports and awaits a stabilization in domestic coal demand. With natural-gas prices now well off their lows, it's quite possible that we could see an uptick in coal use in 2014.
Finally, speculation from Investor's Business Daily of increasing merger and acquisition activity in Europe in 2014 boosted volume and interest in French phone company Orange (ORAN 0.05%) this week. According to IBD's speculative scenario, a push by AT&T into Europe via an acquisition of U.K.-based Vodafone could cause Deutsche Telekom and Orange to consider merging. The two, as IBD noted, already have a joint venture wireless partnership in the U.K., and they could certainly save a lot in cost synergies from merging. As a shareholder, I still believe Orange is incredibly cheap relative to its cash flow and would look for it to continue its push into Africa as way to keep boosting its top-line numbers.
We can do better
You win some and you lose some. This was certainly not a banner week for this portfolio with American Eagle's CEO stepping down, Arch Coal warning on its fourth-quarter results, and Dendreon giving up nearly 10%. Overall, this portfolio is now down by 2.6% to the S&P 500 with just one week left in our yearlong experiment. Following the conclusion of next week's recap we'll take a closer look at the best and worst performers, as well as lessons learned from this experiment.
Check back next week for the latest update on this portfolio and its 10 components.
