Stock Market Competition Update

by JT McGee

You know that blogging duo at Sustainable Personal Finance?

They’re stoners!

I’m kidding. But they’re kicking my rear in the 2012 stock market competition with a Pink Sheet marijuana stock, MJNA. Look at this year-to-date performance:

Sore Loser

I thought I had this quarter wrapped up after the Adams Golf buyout. I’ll admit, I was getting cocky – I won TFB’s contest last year with an eclectic mix of undervalued small caps including MDF, CNU (bought out by MDF), ADGF, and WTT.

This year I went a little bigger in terms of company market cap, and picked ADGF, RIG, F, and DAR. These four companies are my favorites in so far as generating a massive total return. In the first three months of the year, the total return is just over 39% for the portfolio. Not bad against the 11% return of the S&P500 index.

In cycles where the general market falls, I expect my portfolio to remain flat. In cycles where the markets rise, I expect my portfolio to outperform. I want at least 20% over the market per year, which means I HAVE to concentrate, and more importantly, select only the securities that trade well below what I determine to be their fair value.

My chart isn’t nearly as cool as SPF’s:

Expectations for the Rest of the Year

  1. Adams Golf (ADGF) – Sold and gone at $10.80 for a 67% return from January 1. No more upside here, unless there’s another bid to buy the company.
  2. Transocean (RIG) – Some upside remains. My model says sell at $65.
  3. Ford (F) – Some upside left. My model says sell at $19. I’m a little afraid of this one – Japanese automakers have recovered from the earthquake and tsunami. In the short term, I expect a shakeout as their market share “drops” because of Toyota coming back. Loyal Toyota fans have likely pushed off new purchases, and will come out in force when Toyota cars hit the lots in quantity. Pent up demand is not a real loss of marketshare, but retail money is heavy in Ford. Watch investors freak out about long-term prospects on a short-term shift in demand later in the year. Fairly predictable, but I’ll hold on. Not that much to lose, really. I do have a bone to pick with management for opting for a dividend. While that does help the market find a higher price for the equity, I would have preferred buybacks. Actually, that’s nonsense – Ford should be hoarding cash right now to get to investment grade status with their debt. That would GREATLY increase my fair value expectations, as the cost of capital should drop precipitously.
  4. Darling International (DAR) – I said in my first post that I wanted $18 out of this stock by summer. It got there faster than I thought, mostly from lower natural gas prices (thanks warm winter!) and increased revenues from an acquisition. This one is close to fair value. If I were a long-term player, I’d hold onto it longer. However, at the current price, this one no longer offers an excellent total return. Unless management improves its capital structure by working through acquisition debt before leveraging the company for share repurchases or (shriek!) dividends, then I’m bored with it. The market agreed with me that it was pricing in too much risk. Now there’s not nearly as much of an edge. Darling offers a good margin of safety given their business model and industry. However, there is not much short-term margin of safety, as the company has no significant assets backing the current market value with an implied discount rate that is, given the small size of the firm, fairly low.

Best Case Scenario

Here’s my best case scenario: ADGF up 67% (done deal), RIG up 82%, F up 86%, and DAR up 50% in a single year. This is good for a return of 71.25%, which is conveniently right in line with my returns in 2011.

Assuming the market only meets me in the middle of my valuation expectations for companies still in play, I’m looking at 67%+41%+43%+25%, which is 44% this year. That’s a killer return, don’t get me wrong, but it’s not good enough to win a single-year competition. In the long haul, I wouldn’t mind compounding my wealth at a 44% rate annually. That’s good enough to turn $100,000 into $3.8 million in ten years. Awww yeah.

The Good News!

The good news is that my 67% return with Adams Golf is locked in. That cash position gives me a huge buffer should the markets fall off a cliff later in the year.

Also, in real life, I’m in RIG and F options, which significantly decreases my downside, while providing incredible upside. My average prices in real life are not consistent with the prices from January 1. I bought RIG options at a higher price than the year starting price. ADGF I had held for a very long-time, F options were purchased in the fall. Leverage from options does cancel out the effect of paying more for RIG, and my current portfolio is doing better than the competition performance. I mean, Ford options are up 50% on a ~25% move in the equity, for example. This is just one of the many reasons why I think options are underrated by investors as mere gambling, as they provide for very limited downside and improved upside. Any time you can reduce risk in the loss of capital and increase upside potential, you’re making the right move, in my not so humble opinion.

Can’t be bothered to break out returns on an annualized basis. In that case, my stock market competition results are probably trumping my portfolio returns as ~40%*4 is pretty ridiculous. When I figure out how to make 160% in a year, I probably won’t be writing here. 😉

The Bad News!

Stocks like MJNA and AAPL are trolling me!

Disclosure so I don’t get arrested: Sold ADGF. Long DAR. Long RIG, F options.

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