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 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 thought 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 of 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
You'll notice this was a slightly "longer" week than usual, and I attribute that to spending some time with family and friends on a still ongoing vacation. However, while I was away, Arch Coal made a strong 6.4% move to the upside from the last time we looked at it. Two factors seem to be playing a big role in its run higher, including better-than-expected earnings results from coal miner Peabody Energy, as well as Arch's reaffirmation that it would continue to pay a quarterly dividend of $0.03. My thinking here is, "Why would Arch Coal pay a quarterly stipend if it was concerned about its cash flow?" Investors see this as a sign of confidence on Arch's part and gobbled up shares over the past week.
This week's loser
With the markets trending generally higher over the past week and change, there were too many big moves to the downside. But if there must be a loser, biotechnology firm Dendreon will take the crown with a 2.6% retracement. Although no company-specific news has been announced since it received a positive opinion with regard to Provenge in the EU from its panel, investors could be reacting to the reality that another loss is on the way this quarter and even a European approval for Provenge wouldn't spell immediate relief for the struggling Dendreon.
Also in the news ...
Let's not sugarcoat this one iota: It was a really busy week for earnings news, with network equipment maker QLogic , printing and IT specialist Xerox , and telecommunication services provider Orange all reporting results.
For QLogic, we knew ahead of time that the results would be bittersweet, with the company taking a charge to restructure its operations and reduce costs. In its fiscal first quarter, QLogic delivered a 13% decline in revenue to $113.1 million, with an adjusted profit of $0.18 per share. The company's sales figures were more or less in line with estimates; however, EPS was $0.04 better than expected. QLogic saw its biggest revenue drag coming from a 14% drop in its advanced connectivity platforms segment, but it remains well on track to achieve its annual cost-cutting goal of saving $20 million.
Xerox delivered an even more impressive second-quarter earnings beat in my eyes, with a profit of $0.27 per share compared with the Street's expectation of just $0.24 in EPS. In spite of just a 1% increase in revenue to $5.4 billion, the big story here is its ongoing restructuring efforts, which are placing more emphasis on the service side of its business -- health-care processing and tollbooth operating, for instance. This segment now accounts for 55% of its total revenue and is relatively non-cyclical and recurring. Perhaps best of all, Xerox reiterated its full-year EPS forecast of $1.09-$1.15 and is projecting $2.1 billion to $2.4 billion in operating cash flow. I've said it before, and I'll say it again: I like what I see from Xerox!
Finally, we had Orange (formerly France Telecom) reporting, and I knew heading into its first-half earnings report that things wouldn't be pretty. During the first half, Orange gained 244,000 net new subscribers, but it struggled to get existing and new customers to pay more, with average revenue per user dropping by 12.1% compared with the year-ago period. Overall net income also fell by 38%. However, despite the negativity, operating cash flow isn't nearly as dire as some investors had expected, with the company predicting a drop from 2012's $10.5 billion to a figure of more than $9.3 billion, according to Orange's management. The allure of Orange has been its impeccable cash flow all along, and that doesn't seem all too disturbed by tougher competition within Europe.
It's also worth mentioning that we're a bit heavier in the dividends receivable column, having collected quarterly payouts from both Staples and Dell.
We can do better
As has generally been the case with a market that refuses to go lower, a portfolio composed of deeply discounted and contrarian names isn't going to be a top performer. Although I again managed to add a few more dollars than the last time we looked, the S&P 500 beat me by 0.3%! I continue to believe that this is a portfolio that will outperform over the long run, but I also would love to see the market going up every day, as it'd give my contrarian names a chance to shine.
Check back next week for the latest update on this portfolio and its 10 components.
Keep in mind that contrarian thinking can work both ways. With the American markets reaching new highs, investors and pundits alike are skeptical about future growth ... but they shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!
The article One Person's Trash Is Another Person's Treasure Portfolio originally appeared on Fool.com.Fool contributor Sean Williamsowns shares of QLogic, Dell, Skullcandy, and Orange, but he 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, Skullcandy, and Staples, and recommends Exelon and Orange. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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