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My '04 lesson: Dump losers
Deckers Outdoor and Bebe Stores were among my best picks this year; Netflix and Krispy Kreme were among the worst. One key lesson: Dropping losers quickly would have helped performance.
By Robert Walberg
This is the time of year when we look back at the year that was and forward to the year that will be. I dont have much use for the crystal-ball stuff, because there are simply too many unknown variables to make the practice useful. But reviewing your financial advisor's performance is always useful.
Toward that end, Ive prepared a detailed accounting of how my investment candidates behaved in 2004.
Given that I write a column nearly every week in which several companies are profiled, the list is rather long. In fact, over the past 12 months ending Dec. 27, I identified 128 investment candidates in Street Patrol columns. Of these, 89 posted gains, a success rate of nearly 70%.
That's not great, but its not lousy either, especially if you consider that I picked nine stocks in the semiconductor and radio-broadcasting industries. Needless to say, neither industry shined this year. Eight of the nine were losers. Simply removing these struggling industries from the list pushes the success rate over 75%, in line with my objective of 75% to 80%.
To my chagrin, a few retail winners turned to losers over the past few weeks, as the holiday shopping season failed to live up to early expectations. This turn of events also dampened the portfolio's success rate and performance a bit.
Finally, there were a handful of big losers such as Netflix (NFLX, news, msgs), Magal Security Systems (MAGS, news, msgs), Krispy Kreme Doughnuts (KKD, news, msgs) and Hot Topic (HOTT, news, msgs) that tumbled by 64%, 60%, 43% and 42%, respectively. Obviously, in an actively managed situation, these stocks would never have been allowed to do that kind of damage to a portfolio.
The bottom line: A simple 10.3% return
These caveats aside, the end result was a simple return of 10.3%. Of course, this doesnt include dividends or transaction costs. There was also no attempt to annualize the data or to equalize it by making each investment equal in scope -- in other words, setting a dollar figure in each stock. Doing either would only enhance the results.
Even without any such adjustments, the performance was reasonably good when you consider that over the same period the Standard & Poor's 500 index ($INX) rose by 8.4% and the Nasdaq Composite ($COMPX) climbed by 7.5%.
Ill take outperforming an index by 2% to 3% in a relatively challenging, range-bound year any day.
Bolstering the group were solid performances by the hotel/casino, education, apparel retail, retail, international steel, boating, sporting goods, shoe and energy industries. Standouts included Deckers Outdoor (DECK, news, msgs), up 123%; Bebe Stores (BEBE, news, msgs), up 93%; Marine Products (MPX, news, msgs), up 71%; Companhia Vale do Rio Doce (RIO, news, msgs), up 62%; Marriott (MAR, news, msgs), up 52%; Aztar (AZR, news, msgs), up 49%; Abercrombie & Fitch (ANF, news, msgs), up 45%; and Harvest Natural Resources (HNR, news, msgs), up 35%.
Two companies I recommended turned into acquisitions. Galyans was acquired by Dick's Sporting Goods (DKS, news, msgs) for $16.75 per share, resulting in a gain of 87%. Meanwhile, Marsh & McLennan (MMC, news, msgs) bought Kroll for $37 per share, which resulted in a gain of 32%.
What to avoid
If there was a lesson to be gleaned from the losers, it was that its probably best to avoid relatively illiquid, smaller-cap stocks that have already had a great run. Stocks such as Netflix, Possis Medical (POSS, news, msgs), Magal Security Systems, Napco Security Systems (NSSC, news, msgs) and Navigant International (FLYR, news, msgs) came crashing back to earth at the first sign of trouble. Again, this is where more active management would limit the scope of declines.
One goal for next year is to do a better job of staying on top of my picks, especially those that are small and lightly traded, because they have the biggest potential to do serious harm. Given the breadth of selections, that wont be an easy task, but I promise to do better.
As for what worked, the majority of winners were culled from the mid- to large-cap universe. They also tended to be companies that:- Produced superior profit margins.
- Generated relatively high returns on equity.
- Had consistently strong earnings growth, improving momentum and discounted valuations.
This isn't an easy combination to find, especially the value part. But when discovered, it more often than not leads to winners.
Looking ahead to next year, Ill work to unearth more cheap, overlooked candidates that offer the promise of outsized returns. As I do so, hopefully I'll continue to earn your trust. Good fortune in 2005.
| Walberg's top 20 picks for 2004 | | Column | Company | Price when picked | Price Dec. 27 | % return | | 4 stocks that put their best foot forward | Deckers Outdoor (DECK, news, msgs) | $21.58 | $48.02 | 123% | | 4 women's clothing stocks for happy holidays | Bebe Stores (BEBE, news, msgs) | $21.15 | $40.92 | 93% | | Up 113% -- and just getting warmed up | Galyans (acquired by Dick's Sporting Goods (DKS, news, msgs)) | $8.94 | $16.75 | 87% | | Maritime stocks that could float your boat | Marine Products (MPX, news, msgs) | $14.88 | $25.46 | 71% | | 4 zesty foreign steelmakers to consider | Companhia Vale do Rio Doce (RIO, news, msgs) | $17.23 | $27.86 | 62% | | 3 casino stocks with the hottest hands | MGM Mirage (MGG, news, msgs) | $44.86 | $69.36 | 55% | | 5 great back-to-school stocks | Too (TOO, news, msgs) | $16.03 | $24.57 | 53% | | 5 standouts in the risky security sector | LoJack (LOJN, news, msgs) | $7.90 | $12.04 | 52% | | Terrors worries have hotel stocks spooked | Marriott International (MAR, news, msgs) | $41.30 | $62.80 | 52% | | Terror worries have hotel stocks spooked | Marcus (MCS, news, msgs) | $16.85 | $25.30 | 50% | | 3 casino stocks with the hottest hands | Aztar (AZR, news, msgs) | $22.93 | $34.15 | 49% | | It's a whole new ballpark name game | McAfee (MFE, news, msgs) | $19.06 | $28.10 | 47% | | 5 great back-to-school stocks | Urban Outfitters (URBN, news, msgs) | $29.62 | $43.63 | 47% | | 4 stocks that put their best foot forward | Weyco Group (WEYS, news, msgs) | $30.14 | $44.00 | 46% | | Retailers ring up big profits; 3 stand out | Abercrombie & Fitch (ANF, news, msgs) | $32.10 | $46.39 | 45% | | 3 department stores with the right stuff | J.C. Penney (JCP, news, msgs) | $28.10 | $40.32 | 43% | | 4 zesty foreign steelmakers to consider | Tenaris (TS, news, msgs) | $34.85 | $47.91 | 37% | | 4 oil stocks that aren't out of gas | Harvest Natural Resources (HNR, news, msgs) | $12.45 | $16.77 | 35% | | 3 underachievers need to buckle down | Corinthian Colleges (COCO, news, msgs) | $13.80 | $18.26 | 32% | | 5 standouts in the risky security sector | Kroll (acquired by Marsh & McLennan (MMC, news, msgs)) | $27.93 | $37.00 | 32% |
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At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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