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Chasing Value: 2009 picks 731% better than S&P -- 2nd quarter review

07-02-2009

The second quarter is now behind us and for the most part it was a positive one in terms of the market pushing higher almost 40%. This is the second review of my 2009 stock picks through June 30 (see: Chasing Value: 9 picks for 2009 -- APC, GE, ISRG, WFC and more). There was a lot of talk about green shoots this past quarter as Wall Street was looking for any small bit of optimistic data to support the market.

The federal printing presses continued to run at full speed pushing the dollar lower and oil prices higher. While the feds were printing money to cover their deficits, the States do not have that same luxury and many of them are having trouble balancing their budgets to the tune of billions of dollars.

California raised sales taxes and many fees to try and make up some of the shortfall but remains $24 billion in the red, so today it started issuing IOU's, which sent me ranting.

In my first review the big winner was American Eagle Outfitters (NYSE: AEO), and it remained the best performer. In addition five of the nine stocks were in positive territory this time around, improving significantly.

On March 9, I posted Nostradamus was a punk! Have we reached bottom? -- what timing! So far that remains the low point.

Contrasting American Eagle Outfitters (NYSE: AEO), the big loser after the last review was Wells Fargo & Company (NYSE: WFC), however, WFC picked up a steam in the second quarter, besting our new loss leader EZCorp Inc. (NASDAQ: EZPW) by a large margin.

Among the nine stocks, seven originally paid a dividend. The average yield for the nine stocks was 4.82% when the year started. However, during the first quarter AAUK stopped paying a dividend and GE and WFC cut their dividends substantially, reducing the average payout to 3.31%. This is still a nice yield but not nearly what I hoped for.

In previous yearly recommendations I included both stocks that I owned and did not own, for 2009 I own all of them. I have been a buyer throughout the turbulence and have benefited by capitalizing on others' fears. I have reviewed the nine stocks from year end as of the date of the December post and also from my cost basis, which is not a static point, and there is a big difference in results.

Review based on December 30 closing price: The average change ended positively gaining 7.65%, but adding the dividend of 1.66% (3.31 x ..5) totaled 9.31%, a decent gain, beating the DJIA and S&P by a large margin but losing out to the NASDAQ which made strong gains. There were five winners among the nine this time.

  1. American Eagle Outfitters (NYSE: AEO) improved dramatically from $9.13 to $14.17 for a 55.2% gain.
  2. Anadarko Petroleum (NYSE: APC) went from $37.95 to $45.39 for a 19.6% gain.
  3. Anglo American ADR (NASDAQ: AAUK) began at $11.37 and increased to $14.63 for a 28.67% gain.
  4. Annaly Capital Management (NYSE: NLY) started at $15.29 going to $15.14 for a 1% loss.
  5. Diageo plc (NYSE: DEO) was $55.65 and rose to $57.25 for a 2.88% gain.
  6. EZCorp Inc. (NASDAQ: EZPW) sank from $14.81 to $10.78 for a 27.21% loss.
  7. General Electric Company (NYSE: GE) was initiated at $15.82 compressed to $11.72 for a 25.92% loss.
  8. Intuitive Surgical Inc (NASDAQ: ISRG) was $124.34 but sprang up to $163.66 for a 31.62% gain.
  9. Wells Fargo & Company (NYSE: WFC) began at $28.80 improved a lot but still lagged behind at $24.26 for a 15.76% loss.

Review based on my cost to date: The average return was a whopping 21.88.% gain, plus the dividend of 1.66% (3.31% x .5), totaling 23.54% beating the market and besting the Standard and Poors Index by 731%. Current yields are in parentheses. Acquiring additional shares reduced my basis on several stocks. Seven out of the nine ended June in positive territory.

  1. American Eagle Outfitters (NYSE: AEO) from $8.99 (4.39%) up to $14.17 for a 57.62% gain.
  2. Anadarko Petroleum (NYSE: APC) from $34.00 (0.97%) up to $45.39 for a 33.5% gain.
  3. Anglo American ADR (NASDAQ: AAUK) from a lower $9.80 (cut to 0%) up to $14.63 for a 49.29% gain. This is the only stock of the nine I chose to sell on the upside and buy back two days later. I am not counting the gain from the sale, just the current buy-in price.
  4. Annaly Capital Management (NYSE: NLY) doubled down lowering the average to $14.40 (15.01%) and ending at $15.14 for a 5.1% gain.
  5. Diageo plc (NYSE: DEO) added shares reducing the average to $49.48 (4.67%), which rose to $57.25 for a 15.7% gain.
  6. EZCorp Inc. (NASDAQ: EZPW) adding shares reduced the average to $12.34 (0%), which closed down to $10.78 for a 12.64% loss.
  7. General Electric Company (NYSE: GE) held at $16.00 (reduced to 3.03%) that dropped to $11.72 for a 26.75% loss.
  8. Intuitive Surgical Inc (NASDAQ: ISRG) added shares reducing the average to $119.27 (0%), which jumped to $163.66 for a 37.22% gain.
  9. Wells Fargo & Company (NYSE: WFC) added shares several times reducing the average significantly to $17.60 (cut to 1.76%), which improved to $24.26 turning around for a huge 37.84% gain.
Review of the three major indices: Two were up and one was down. The average return was a 6.31% gain, plus the dividend of 1.2% (2.4% x .5) totaling a 7.51% return if you invested in all three equally.

The 2009 picks are doing very well so far although the NASDAQ has shined even more brightly. My own portfolio obviously is managed and responds to opportunities that the fixed portfolio from December is not meant to do.

Any suggestions you find on our site are subject to change rapidly and you cannot depend on following blindly given so many variables, and hope to come out with similar results to another investor. I made changes during the first six months of the year; I reported many of these trades, but did not have the time or the obligation to report every detail.

In addition actual portfolio results beyond these picks were juiced dramatically by naked puts at moments of extreme fear. As an example, I "sold to open" a position in Bank of America (NYSE: BAC) at a May strike price of $7.50 expiring next Friday May 15. I was paid $1.45 per share and on Friday May 8 the premium had dropped down to 2 cents and it will go to zero and expire. I posted several stories on this subject see: Chasing Value: Will we be eating out of trash cans?

American Eagle Outfitters: I have been surprised that a retailer is the winner among my picks but AEO has a very strong balance sheet with about 10% of its capitalization in cash, when last I checked, and no debt.

Anadarko Petroleum: APC has moved up as oil has moved up. Having 70% of its reserves in North America remains a very positive attribute. Natural gas prices have remained soft but if this changes it should contribute to further gains .

Anglo American: last time I reported that AAUK had eliminating it's dividend, sold off assets, closed mining operations, cut its workforce in an effort to "right-size the company. It has succeeded to some degree and clearly this has been recognized by other. Serious Money: Anglo American - Xstrata merger?

Annaly Capital Management: The stock is just floating along for the most part paying its sizable dividend as planned, and that alone has beaten the market by a lot.

Diageo: The company has been on the upswing for the past two months. The company has been wheeling and dealing globally with noteworthy activity in China and India, bringing out new products and making changes in its manufacturing plants.

EZCorp: This has been my biggest surprise and for reasons beyond my grasp. The company continues to grow and prosper but the stock is doing poorly.

General Electric: GE has been issuing press releases faster than any company I know of. It still pays a dividend, and raised its cash position, but still struggles under the shadow of its financial division and the threat of unknown damage that could be caused by its commercial mortgage and real estate assets.

Intuitive Surgical: ISRG made a strong move after dropping below $100 dollars a share. They still have a great product and no competition but there are those that think hospital budgets will constrain potential near term growth.

Wells Fargo: WFC has been down with the financial sector and rebounded with the sector as well. The bank is benefiting from reduced competition, lower interest rates, and higher margins and a lot of refinancing that has been spurred as a result. They have reported that a third of the Wachovia branches they inherited will be closed.

I will review the picks again after the third quarter and at year's end. After climbing for almost 12 weeks the market is down on worrisome employment data. Since this is not a surprise and also a lagging indicator I wonder if the market is not responding more to the upcoming long weekend.

I know that a lot of people are still sitting on the sideline earning little so I posted Serious Money: Five high-yield, safe, diversifed stocks to show those folks that you can participate relatively safely in the market and make a profit while waiting out better times.

I wish all my readers a joyous and peaceful 4th of July week end. Even in these troubled times I would not want to live anywhere else.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of all nine stocks as indicated.

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