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miclane05 (94.06)

October 2011



picks of 2011 in review

October 05, 2011 – Comments (0)

I considered compiling this update/ review a couple of weeks ago and am glad that I waited for the last month to finish out. I'm pretty sure all of the stocks identified lost value during that time, and it would be easy to look at the cumulative 4.5% decline since January as a negative. Yet, not only have the picks again beaten the S&P 500 by just shy of 10%, but when you also factor in MPEL's 40% decline in the past 60 days, PM's 17% loss over that period, and NOV's big fall as well, I start to smile as I realize that, despite these large losses, each of these picks beat the index, and that environments like these, with steep losses all over the market, remind me of '08 and early '09 when ownership of outstanding companies went on sale and set the stage for big gains.

Lets start by looking at the top 11 picks' performance.  The S&P 500 is down 18.7% since June 1, and 14.1% since January 7, 2011, with my prior picks besting that mark by an average of 9.7%, meaning that they are, on average, down 4.4% since January 7. Specifically, they break down as follows:*
MPEL +32.5
MCD +29.9%
PM +24.6%
LMT +15.3
AVAV +8.2%
ATW +3.4%
MSFT +2.3%
NOV +2.3%
Brk.B +2.1%
WM +0.9%
NUE (15.1%)

*numbers are versus S&P 500 (Since Jan. 7, 2011) and are not-dividend adjusted.
Average +9.7% gain over S&P 500.

As mentioned earlier, the past two months dramatically altered the performance of several of these picks, as well as the broader market. MPEL's pullback stems from reduced growth projections in china, though, considering revenue in Maccau grew 57% last quarter, the market has probably over-corrected for the "slowdown" and I remain optimistic. In a bit a selfishness for my real life holding, the pullback actually brings the call option i sold awhile back "out of the money" which is nice because I never anticipated the huge gains from earlier this summer and would've had to leave some of that profit on the table if the option expired "in the money." currently trading around $8/ share, I see mpel returning to double digits rather quickly. Considering the current list is a bit risk-averse, mpel offers the highest ceiling, but also the most volatility.

PM's pullback is mainly due to eurozone problems, since the company reports in U.S. dollars but earns all of its revenues overseas, and large portions throughout the EU, a stronger dollar will drag down EPS due to currency conversion. That said, the company just raised dividends 22%, to .77 per share this quarter, and international turmoil always provides a great entry point. It has outperformed the market every year since its '08 spinoff and provides a growing, 4.5% dividend yield, so I maintain my belief that investors should keep some change available to grab a few shares on these temporary price dips. Yes, new Canadian and Australian proposed regulations add to the constant calls for the industry to whither away. But Europe is still a cash cow, Africa and Asia are growing, and with all the dividend increases, my real life holdings already sport a 7.1% effective yield. At this rate, in three more years, the effective yield will beat the interest rate on my credit card, so yeah, i'm still bullish.

That leaves NOV (and also ATW and NUE) as other hard hit companies as of late. Obviously, oil and steel shares have taken a beating as investors worry about global recession or slow growth. At these prices, all three stocks are attractive to investors with long enough horizons to take advantage of time-arbitrage and stable balance sheets to weather any prolonged downturn. Steel, and to a lesser extent oil, are cyclical and investors willing to purchase at these low p/e multiples can still enjoy decent dividends while awaiting for global consumption to pick up. I still think NOV and NUE are the preferred picks of their industries balancing the spotless balance sheets of both, with the growth prospects ahead, but I do understand that some investors might prefer the dirt cheap MT right now over NUE.

Speaking of buying shares at low valuations, Brk.b just authorized its first ever share buyback as a result of valuations, on a price-to-book metric, dropping all the way to 1. Currently trading just over 1, the market has not only removed any "buffett premium" but its removed all premiums despite brk.b's ability to command favorable deals and obtain concessions that no other conglomerate enjoys. At the same time, I understand why its not at the top of buyer's shopping list because, realistically, its the least likely pick on this list to post a 50% gain next year. Even a 30% gain would be surprising, while half of my other picks have posted gains exceeding 30% in the past two years. At this stage, buying shares of Brk.b is somewhat akin to buying an index fund or spdr. While brk.b has a low beta, so do half these other picks, so its hard to even point conservative investors to brk.b when growth is so limited. But, I keep brk.b on this list for the same reason that i use a generic target retirement fund for my roth ira. One day, armageddon may finally hit the tobacco industry, china may outlaw gambling in maccau, scientists might invent a way of decomposing trash into fuel, eliminating WM and NOV at the same time, but owning brk.b means that I own Geico, General RE, Kraft, Coca-cola, Moodys, Wells Fargo, Burlington Northern, American Express, Bank of America, Fruit of the Loom, and of course, McLane Company, just to name a few, all at the same time. I hope that it continues to beat the market in the long term, but having shares of brk.b anchor my portfolio allows me to jump at other, less certain, opportunities without too much worry. If I hit a home run, like NFLX or AAPL (or AMZN if I hadn't bailed early), then I'll be happy, but having a bunch of brk.b means that i can afford to swing at a few pitches and not hit a home run every time.

With so many great ideas out there though, some of the picks have to move into the hold category to make room. Thus, LMT is coming off my list and moving into the hold box. In January, it was just too cheap not to pick up, especially considering its decent dividend yield. Factoring in the dividend (3.3%), LMT was a good spot to park money at a time when good opportunities were harder to find, but new money has better options these days. AVAV comes off the list and into the hold box as well because the current opportunities in lower risk stocks outweigh adding to a speculative pick. Finally, MSFT also goes into hold, even though I maintain that its due for a comeback and think that anyone buying AAPL near $400 needs to consult some historical charts before clicking the "purchase" button. Not to digress too far, but too many people are bullish on Apple, without considering that its size will weigh on future growth, its industry and its own performance have been historically cyclical, and competition driven commoditization will lower avg. sales prices and squeeze revenue. I'm sure tomorrow's iphone 5 will send the stock shooting higher and everyone will cheer and say that another year of 80% growth, or even 40% growth, lies ahead. I will not be one of them.

In reviewing the old "hold" bin of AKO-A, HAS, and FO, and discard pile (RST), we also did a good job of ditching RST rather than sufferring further losses, and new money in AKO-A and HAS would not have performed as well as the remainder of the list. FO, on the other hand, continued to have another strong year and recently completed its spinoff (you now own 1 share of BEAM for each share of FO), but I'm still keeping in on hold for now.

That brings us to new addittions heading into 2012.

Intel - INTC: Take a product that is ubiquitous with technology, give it an above average growth rate (14.9%), combine it with an above average and growing dividend yield (3.3%), then sell it for a p/e of 9. Thats intel. Even if consumers continue to migrate away from PC sales in favor of using smartphones and tablets, businesses continue to shift away from paper data storage in favor of electronic storage or cloud computing. All of those servers still need intel's chips.

Aflac - AFL: Aflac grew its revenue 14% this year, raised its dividend (yielding 3.3% at today's price), and after losing over 30% of its value in the past 7 months, sports a p/e of 9. Much of its decline is due to slowing growth in japan and investors fear over the risk of some of its muni-bond investments. yet, aflac has been addressing those concerns and their numbers continue to shine. Like LMT in January, this is simply too good a business at too good a price to pass up.

Rackspace Hosting - RAX: Considering how risk-averse the rest of this year's list is, we need something to get excited about beyond a lot of chinese gambling. So I'm tapping RAX as my pick to continue the trend of electronic data storage and cloud computing. RAX is a leader in the field and has lofty growth prospects. This naturally means that the stock always looks too expensive, and was precisely why it didn't make the 2011 list. But after another year of beating expectations, and the S&P 500 (by 21%), I'm ready to jump on board before the rest of the bandwagon. Growth next year is estimated at 52% and this type of data storage should completely take over in the next few years. RAX is also probably a buyout target. The one concern is that RAX' accounts receivables has outpaced revenue growth the last couple of quarters, meaning money is falling through the cracks of the floor for some reason. I'll pretend that they've been too focused on growth to start chasing the pennies, but don't want the trend to continue for long. Still, RAX is my best bet to add a little excitement back into this list after departures from MVL, NTES, and NFLX were replaced by more conservative choices and have given a pretty risk-averse bias to the list.

Thats all for the 2011 wrap-up.  [more]

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