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
This week's winner
Leading the charge this week is struggling coal miner Arch Coal , which added 5.9% after announcing a series of transactions aimed at improving its financial flexibility. These moves, announced on Monday, would include a reduction in its senior credit facility in exchange for select amendments while also increasing its term loan facility by $300 million to $1.95 billion. Arch is also starting a cash tender offer to redeem $600 million in notes due in 2016. I certainly won't count my chickens before they're hatched, but I believe Arch should be able to complete this refinancing and save itself $0.10-$0.20 in EPS each year in interest alone.
This week's loser
On the other end of the spectrum, it was a miserable week for shareholders of connectivity components maker QLogic , which shed 4.5% despite a lack of company-specific news. Despite lower quarter-over-quarter comps in the second quarter, QLogic's EPS topped expectations on its aggressive cost-cutting plan. This week's downtrend may simply be investors taking profits following what's been a pretty impressive 35% rally from its lows this summer. I remain a confident shareholder and feel that connectivity component makers like QLogic are primed for an impressive 2014 given just how much telecom service providers are spending to improve their network infrastructure.
Also in the news...
There are few things I enjoy more than a dividend payment, which is why I'm so excited that overseas telecom provider Orange has one on the way with the stock going ex-dividend two days ago. Orange has declared what amounts to a payment of $0.39768-per-share dividend, which, when added together with its previous semi-annual payout of $0.26368 that we received in June, equates to a very nice yield of 5.4% when all is said and done. I personally own Orange in my own portfolio and see no reason to sell as long as it continues to bring in solid cash flow.
Printing and IT service specialist Xerox dipped slightly this week after announcing the sale of $500 million in bonds following a credit rating upgrade to BBB from BBB- from Standard & Poor's. According to S&P, the rating upgrade was made due to a change in its own measurements that helped improve Xerox's cash flow and leverage. Xerox plans to use the money raised for general corporate purposes. While I usually dislike seeing companies take on extra debt, in this case at least it's being done at a reasonably low interest rate, and Xerox is now ultimately one step further away from falling out of investment grade territory.
Finally, teen retailer American Eagle Outfitters announced three new multi-store international licensing partnerships on Tuesday. According to its press release, it will be partnering with Pacifica Lifestyle in Thailand, Grupo Comercializadoras in Colombia, and Grupo David Enterprises in numerous Central and South American countries, as well as the Caribbean. Furthermore, American Eagle notes that it plans to open another 40 licensed stores overseas in 2014. Despite delivering solid growth in the U.S., American Eagle Outfitters has an opportunity to really pad its top-line growth in overseas emerging markets.
We can do better
Just as I said, all we needed was a slight down week in the S&P 500 for this portfolio of deeply discounted and contrarian names to catch up and close the gap. At a 2.2% underperformance, we are closer than we've been in about 10 months to catching the S&P 500, and most of that has to do with Xerox and trucking company Arkansas Best motoring higher. With a few dividends on the way over the next two weeks from Exelon, Arch Coal, and Orange we may just have enough steam to blow by the S&P 500 and leave it in the dust!
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 owns shares of, and recommends 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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