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Energy, value worked best in 2005
A look through my columns this year shows that value stocks and the energy sector paid off best. Playing big-picture cultural trends often did not.
By Michael Brush
How did I do this year?
Pretty well. With a strong push from energy stocks and some help from a trip to the value bin, I beat the S&P 500 and the average mutual-fund manager.
Here are some highlights:
- All told, my picks were up 11.96% in 2005, through Dec. 16. That's better than the 8.47% return of the average actively managed U.S. stock mutual fund, as measured by Morningstar. It's also better than the S&P 500's ($INX) 4.9% return over the same period.
- Of the 183 stocks I picked, 63% advanced while 35% lost value. Six of them more than doubled while 92 beat the S&P 500 and 74 advanced more than 10%.
- I did worse when I tried to cherry-pick stocks from my column for our online portfolio tracker. The 58 stocks in that portfolio were up 9.83% as of last Friday. But still that was almost twice the performance of the S&P 500 in the same period.
- Not surprisingly, my best picks were in the energy sector. The 12 stocks I picked in a January column on energy (How to profit from China's oil hunt) more than doubled as a group. My worst picks came whenever I tried to match stocks with big-picture cultural trends like the popularity of poker or the growing number of prisoners. Fortunately, my rule of cutting losses once a stock declines 20% protected against further damage from missteps like these.
To calculate returns, I picked the midpoint price on the day stocks were suggested in my columns before the open, and I used their midpoint prices from Dec. 16. To calculate the S&P returns, I took the midpoint from Jan. 3, 2005 and the close from Dec. 16. I excluded dividends -- which hurt me because many of my picks were dividend plays. But I also excluded trading costs. I assume a simple buy-and-hold approach, protecting against downside with stop-loss orders. (A stop-loss order is a limit order that turns into a sell order once a stock has declined a certain amount -- in my case, 20%.)
Related news and commentary on MSN Money
Beyond the numbers, here are some lessons learned.
Value endures
For much of 2005. we heard from the experts that value -- after years of beating the growth style of investing -- would finally yield and let growth take the limelight. It still hasnt happened.
One of my better columns -- its picks are now up 13.8% -- was a March 30 piece on value stocks in the tech sector (Bargains bloom in the tech sector). A typical value pick like Microsoft (MSFT, news, msgs), the parent of this Web site, advanced 11.8%. Hewlett-Packard (HPQ, news, msgs) is up 34.5%. The biggest winner was Cohu (COHU, news, msgs), a pick suggested by John Buckingham, a value investor who manages the Al Frank Fund (VALUX, news, msgs). Cohu is up 50%. Novellus Systems (NVLS, news, msgs), another name from Buckingham, stopped out after a 20% loss.
Likewise, when Toll Brothers (TOL, news, msgs) rocked the housing sector in mid-November by announcing a sales slowdown, value investors like Buckingham and Ron Muhlenkamp of Muhlenkamp (MUHLX, news, msgs) cut through the confusion and said housing stocks were a buy. So far, so good. The picks from that column are already up 9.3%.
But not all the value plays worked out. Cable stocks like Comcast (CMCSA, news, msgs) looked cheap last summer, given their high levels of cash flow (Cable companies are now cash machines). So far, the picks from that column are down 5.3%.
But my biggest disaster on the value front came in a column about beauty stocks Avon Products (AVP, news, msgs) and The Estee Lauder Company (EL, news, msgs), which were supposed to be bargains (see "Beauty stocks at bargain prices"). Instead, theyve gotten cheaper. Together, those picks are down 18.2%. In fairness to the bargain-hunters who liked those names, value investors normally take positions with a multiyear horizon. So it may be too early to judge those plays.
Follow your contrarian streak
Investing like a contrarian -- which means trying to identify where the crowd is wrong and betting the other way -- is tough because the strategy puts you in situations where a lot of people are telling you every day that you are wrong. But if you have the psychological fortitude to ride it out, this style can pay big dividends.
Last April, for example, many investors were convinced that Home Depot (HD, news, msgs) and Lowe's (LOW, news, msgs) had several problems, such as rising interest rates, that would haunt them (3 myths put Home Depot, Lowe's in a fix). I took the other side of that trade, and the stocks are up an average 26% since then.
Likewise, in early October everyone was sure consumer spending was going to slow down because of higher fuel costs and rising interest rates (Don't bet against retail stocks). But its been a mistake to bet against the consumer at any point in the last several years, and this time was no different. Not all of the nine picks from that column have done well, but as a group they are up 4.6%.
Twice last summer I went along with the crowd and the results were not pretty -- confirming that being a contrarian is a better way to go. In mid-July I was bullish on four retail stocks right when everyone else was rooting for the sector, too, because the group was at its peak for the year (4 retail stocks still on a roll). Bad move. Those four stocks are off 5.2%. Likewise, I made a bullish call on housing stocks near their peak in early August (11 stocks from the years top value pros). That was bad timing, too. The three housing stocks in that column all stopped out with 20% losses, dragging that column on value stocks down to net flat returns so far.
The big picture is fuzzy
Just like last year, 2005 brought plenty of disappointments when I tried to match stocks to big-picture cultural trends. Poker was huge this year. But my attempt to play that trend in a March column on gaming stocks (Gaming stocks still on a winning streak) was a disaster. WPT Enterprises (WPTE, news, msgs), which broadcasts the World Poker Tour, cratered, stopping out for a 20% loss and dragging that column down to a 13% loss year to date.
Likewise, private prison companies were supposed to be a good play on the rising prison population and governments propensity to manage costs by outsourcing prisons to the private sector (3 prison stocks poised to break out).
But one of the stocks in that group fell apart and the other two have been mediocre, resulting in a loss of 8.6% so far. It was also the column that provoked some of the most virulent mail I got for the year -- from people who found it immoral to think about investing in the prison system when so many inmates suffer on a daily basis behind bars.
Why is it so hard to invest in big-picture social trends? Probably because there are a lot of investors smarter than me who are doing the exact same thing, and who get there sooner. So any benefit from the trend is already priced in.
Not all my attempts at investing in big-picture trends were failures. The stocks in an April column on immigration plays (Stocks that will ride the wave of immigration) -- such as Spanish language TV broadcasters -- are up 12.3%.
Don't trust Wall Street
In September, I featured a face-off on Chinese Internet stocks pitting Morgan Stanley (MWD, news, msgs) Internet analyst Mary Meeker against former Wall Street analyst Henry Blodget (Are China's Internet stocks fabulous or flaky?). I sided with Meeker. Boy, what a mistake. As it turns out, Blodget, the one-time Wall Streeter who is now an outsider to that game, was right in warning individual investors to steer clear of these stocks.
Meekers favorite stocks in the group -- NetEase.com (NTES, news, msgs), Shanda Interactive Entertainment (SNDA, news, msgs) and The9 Limited (NCTY, news, msgs) -- soon tanked. They all stopped out with 20% losses in my system. NetEase.com and Shanda are now down 29% and 43%. The9 Limited has recovered slightly.
Broken IPOs are, indeed, broken
It seemed like a good idea at the time. Buy shares of initial public offerings that are at a discount because they trade below their IPO prices, as long as they dont seem to have any obvious defects (Shop 'broken' IPOs for comeback bargains). Two of my five plays on this theme stopped out with 20% losses, while one did well. The picks from the column -- which ran in January -- are down 1% so far this year.
Energy, buybacks and dividend plays were big winners.
My two best picks were small plays on Canadian tar sand reserves, Deer Creek Energy and UTS Energy (UEYCF, news, msgs). They are up 213% and 255%. Deer Creek was recently purchased by the French energy giant Total (TOT, news, msgs). Friedman Billings Ramsey energy analyst Amir Arif deserves credit for those picks. Likewise, the energy sector engineering and construction company Foster Wheeler (FWLT, news, msgs) did well -- gaining 187%. Kudos to Oppenheimer energy analyst Fadel Gheit for that one.
Two other powerful themes were rising dividends and stock buybacks. Columns on those themes (10 bets on pumped-up dividends and 5 Dow dogs about to have their days) are up nicely.
Finally, a word on stop-loss orders. While it always hurts to see a stock get stopped out only to turn around and rise dramatically, in general placing a stop-loss order at 20% has been a helpful strategy. Of my 183 picks, 26 stopped out, and nine of those recovered, while 17 went on to decline significantly more.
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