One Person's Trash Is Another Person's Treasure Portfolio
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 investors that deep-value investing and contrarian thinking can actually be a very 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 felt fit this bill and would expect to drastically outperform the benchmark S&P 500 over the coming 12 months. If you're interested in the reasoning behind why I chose these companies, then I encourage you to review my synopsis on each portfolio selection:
Now, let's get to the portfolio and see how it fared this week:
S&P 500 performance
Performance relative to S&P 500
This week's winner
Audio accessories maker Skullcandy came out of nowhere on Wednesday to become this week's biggest gainer, rising more than 8%. The likely culprit behind the rise appears to be optimism heading into its fourth-quarter earnings results, which are scheduled to be released after the closing bell on Thursday, March 7. Given Skullcandy's founder and CEO, Rick Alden, stepping up to the plate with former CEO Jeremy Andrus resigning and the company valued at less than seven times forward earnings, shareholders like me feel the stock is quite the bargain at this price.
This week's loser
On the flip side, office supply superstore Staples was clipped, shedding nearly 7% on the week after releasing disappointing fourth-quarter results. For the quarter, Staples reported a 3% increase in sales to $6.57 billion as profits slipped 72% to just $0.12. Same-store sales fell 5% and, while adjusted EPS of $0.46 topped estimates by $0.01, revenue fell short of the $6.71 billion estimate. The more damaging news was Staples' 2013 EPS forecast of $1.30-$1.35 versus the consensus of $1.44. If there was a bright spot, it's that Staples is boosting its quarterly dividend by 9% to $0.12 for a new annual yield of 3.9%. At just 9.3 times this year's earnings, and with plenty of merger-related benefits from store closures in the Office Depot/OfficeMax merger, Staples still appears to be an exceptional value.
Also in the news...
You're probably tired of the faux soap opera, "Dell's of our Lives," but the news streaming out of this leveraged buyout continues to get more interesting by the week. We learned yesterday, according to CNBC, that activist investor Carl Icahn has taken a 100 million share (or 6%) interest in Dell. Known for his hands-on approach to investing, Dell investors like myself are excited that he may team up with Dell's other large shareholders to seek out a better deal. Unless Dell is willing to sweeten the pot with a special dividend, it's looking increasingly likely that it'll need to organize a heftier bid if it wants shareholders to tender their shares.
Speaking of investors taking large positions, a 13G filing with the SEC and brought to light by MarketWatch notes that Citadel Investment Group, which is run by Ken Griffin, owns a 4.6 million share stake, or 5% of outstanding shares, in QLogic . I would like to think that Griffin's fund sees the same value and growth blend that I see in QLogic, including its $5.45 in cash per share with no debt, and clear signs from the fiber-optic sector that telecom service providers are boosting their capital expenditures. QLogic was able to boost its EPS and sales estimates well beyond Wall Street's last quarter and I'll be looking for a repeat in the upcoming quarter.
Finally, struggling international mobile service provider France Telecom received some analyst love on Monday in the form of an upgrade by Morgan Stanley from underweight to overweight. Morgan Stanley believes that France Telecom's costs are flattening and that a French price war in mobile is already priced into its shares. With big mobile subsidies on the horizon, Morgan Stanley projected 20% near-term, and perhaps 50% longer-term, upside to France Telecom's shares. With a yield over 10% and more than $3 billion in free cash flow expected this year, it's hard to argue with Morgan Stanley's analysis.
We can do better
Value and contrarian companies continue to fall out of favor as the S&P 500 rockets higher. Even though the portfolio finally turned in a positive week, the S&P 500 rose just a tad more, putting us into a slightly deeper hole at negative 6.6%. Clearly the market can't head up forever; and when it does finally stop, this portfolio of deeply discounted companies should be set up for a strong outperformance.
Check back next week for the latest update on the portfolio and its 10 components.
Is this company the greatest value in my fictitious portfolio?
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The article One Person's Trash Is Another Person's Treasure Portfolio originally appeared on Fool.com.Fool contributor Sean Williams owns shares of QLogic, Dell, Skullcandy, and France Telecom, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Dendreon, Staples, Skullcandy, and France Telecom. Motley Fool newsletter services have recommended buying shares of Exelon and France Telecom.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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