One Person's Trash Is Another Person's Treasure Portfolio
Last November, 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 that deep-value investing and contrarian thinking can actually be a 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 thought fit this bill and could 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 of each portfolio selection:
Now let's get to the portfolio and see how it fared this week:
American Eagle Outfitters
S&P 500 performance
Performance relative to S&P 500
Source: Yahoo! Finance, author's calculations. American Eagle Outfitters replaced Dell, which was taken private in October.
This week's winner
Beaten-down biopharmaceutical company Dendreon topped the charts this week, logging a gain of 11.9% despite a lack of company-specific news. Dendreon shareholders have seen their greatest source of optimism come from rumors that the company could be shopping itself around to the highest bidder. In addition, it announced another aggressive restructuring, wherein it will shed another 15% of its workforce in an effort to save $125 million annually. It still may not be enough to get Dendreon to profitability based solely on metastatic prostate cancer immunotherapy drug Provenge, but it's certainly a big step in the right direction.
This week's loser
On the flip side, office supply superstore Staples dipped 5.2% for the week after reporting its third-quarter results before the opening bell yesterday. For the quarter, Staples' sales dipped 4% to $6.11 billion, hurt by tougher competition and negative foreign currency translation. Its adjusted profit, though, matched Wall Street's estimates of $0.42 per share and reversed a year-ago loss. Despite the revenue miss, Staples did stick by its full-year sales and profit forecast, which I feel is a smart move as the merger between Office Depot and OfficeMax should create opportunities for Staples to snag displaced customers as the two smaller supply stores shut underperforming locations.
Also in the news...
On Friday, Mizuho Financial initiated coverage on teen retailer American Eagle Outfitters with a neutral rating and a price target of $17. The move isn't particularly surprising given that American Eagle and the entire teen retailing sector have seen same-store comps head south for months now. However, I would remind investors that American Eagle Outfitters' management team is, by my standards, far superior than your average teen retailer and much more adept at maintaining cash on its balance sheet and managing its inventory levels.
Similarly, Aegis Capital last Thursday initiated coverage on storage and server connectivity components producer QLogic with a buy rating and a $15 price target. Aegis notes that because of the company's strong cash position and stable gross and operating margins, even modest revenue growth should result in big bottom-line gains. I firmly believe that the big spending we're seeing from the telecommunications providers is going to trickle down and be a driving force for QLogic's bottom line in 2014 -- this is also why I purchased shares of QLogic in my own portfolio roughly one year ago.
Finally, in a rather interesting note, renowned short seller Jim Chanos, in the latest quarterly update for his investment firm Kynikos Associates, noted that he purchased shares of coal company Arch Coal . It's an intriguing maneuver for Chanos, who's often a noted skeptic and not afraid to bet against U.S. companies. I've felt for the better part of this year that investors aren't giving coal enough credit, and that asset isn't going to disappear overnight. Arch is making smart moves by pushing hard to expand its export potential and by cutting its capital expenditures. I remain confident it'll turn around its business eventually.
We can do better
Although the S&P 500 was relatively flat for the week, my portfolio of contrarian and deeply discounted names simply wasn't up to the challenge, with the majority of the 10 stocks ending modestly lower. Trucking company Arkansas Best continues to be the true standout. However, printing and IT service provider Xerox, with its approximately 35% gain, may also wind up seeing accelerated gains from its role in the Obamacare rollout and give this portfolio the push it needs to get ahead of the S&P 500 for good!
Check back next week for the latest update on this portfolio and its 10 components.
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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, Skullcandy and Orange, 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 recommends and owns shares of Orange. It also owns shares of Staples and recommends Exelon. 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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