Gimme My Money!

I'm trying to win the $500,000 prize CNBC is giving away in its stocking-picking challenge. (Cheers! Applause!) To do this, I'm following the advice my Foolish colleague Bill Barker laid out a few weeks ago for a 10-step strategy to win the two-month-long game.

Bill's plan is an admittedly risky approach to investing: Putting together highly concentrated portfolios of stocks with very small market capitalizations that are poised to announce earnings, so as to capture their volatility. But since it's just a game, I decided I would try to emulate it as closely as I could. You wouldn't necessarily want to invest this way in real life, though.

Don't try this at home
As I laid out last week, I screened for the smallest cap companies permissible ($500 million or more) whose stocks were trading below $10 a share, and all showed relatively high levels of short interest. Bill suggested delving into biotechs since they often show the greatest price fluctuations, but I opted to find companies where they lay.

So how am I doing? Well, it seems I'm still in no danger of unseating the leaders just yet, particularly since my five virtual portfolios took a turn for the worse and now have an average return of  minus 3.7%. My worst portfolios have done even worse over the past week, while my best have done better. This week I'll look at the real dog of the five, Portfolio No. 3.

While I'm still unsure just how many players there are, that average return, while not the worst, puts me at 676,526 on the list. The portfolio's value of $883,495.74 puts me well behind the top player, whose portfolio is valued at $1,434,483.04.

A penny for your thoughts
It would seem counterintuitive that deep discount retailer 99 Cents Only would fare so poorly. Considering that nothing in its stores sells for more than a dollar, you'd expect that it would flourish in tough economic times. Just last month it reported fiscal 2007 results which showed sales rising 5% in the fourth quarter. With earnings expected to grow 25% over the next five years, a weakened economy would seem to be a boon.

However, shortly after selecting the less-than-a-dollar chain, Reuters and the University of Michigan issued a poll which showed consumer confidence had fallen to a level not seen since 1980. In response, the value of 99 Cents Only stock dropped like a mark in the Weimar Republic.

A number of discount chains, including Family Dollar (NYSE:FDO), have been faring just as poorly, with part of the reason being that price is not the only factor in purchase decisions. Quality matters, too. The real beneficiary has been Wal-Mart (NYSE:WMT), which has been seeing both sales and profits expand as the economy sours.

A lead balloon?
Not everyone is sold on 99 Cents Only being a cheap play here, however. Over on Motley Fool CAPS, while 75% of the investors rating the stock think it will outperform the market, it has garnered only a two-star rating, suggesting that its support is tenuous at best. However, CAPS investor C4M1 shares these thoughts:  

This company is in the right business currently. The way the economy is more people will be going there to buy things that are not necessities, and even some that are. There may not be a huge future but there is for the next few months.

Movin' on up
A lot can happen in a week's time. Next week we'll see which of my portfolios has made the biggest move in that time span and which may yet catapult me to the lead. (Applause! Cheers!) CNBC is giving away $1 million in prizes total, so even if I come in second or third, I'd still be sitting pretty, with cash in hand and some very impressive bragging rights.