In what I guess is now an annual tradition, I will again share the holdings of my Top 20 Model Portfolio as of year-end. I am happy to report that the picks I shared last year (Same Strategy, Different Players) performed exceptionally well. Of the 20 names, 3 were acquired, including Somanetics (SMTS), Cardiac Science (CSCX) and, recently, Martek (MATK).
Note that all three are Healthcare stocks. In each case, M&A potential was part of my buy thesis. MATK fooled me, though, by first doing its own acquisition. CSCX sold out at a criminally low price after running into some more trouble early in the year. SMTS was the only one that really worked out well for model subscribers - it was a reasonably sized position.
My Top 20 model portfolio, which is (very) actively managed, was up almost 52% in 2010. The average price return of the 20 stocks I shared (the ones I held at the beginning of the year) was 49.2% (higher with dividends), but my weightings helped improve the price return of the original picks to 51.3% (higher with dividends).
In other words, my subscribers would have been better off (after factoring in commissions for trades) had I just done nothing all year. The best analogy is that I changed lanes on the crowded highway very frequently but ended up at my destination at the same time as had I just stuck to my lane. It's a high-class problem! Here are last year's picks:
Not bad! 20 for 20 positive, with 9 names up more than 50%. Too bad that I underestimated the potential for most of them. As I shared last year, I employed the same strategy essentially as the one I used in 2009, where my static portfolio increased 59% (the Top 20 Model was up almost 69% that year). I described the strategy as investing in "out of favor companies with strong balance sheets and strong competitive positions". My 2010 strategy was similar, but the names were very different, as only three names were in the models at both the beginning and end of the 2009.
This year's model begins the year with 4 holdovers: Allegiant Travel (NASDAQ:ALGT), EZCORP (NASDAQ:EZPW), St Jude Medical (NYSE:STJ) and Synovis Life Technologies (NASDAQ:SYNO). EZPW has been in the model now since we launched in 2008. Here are my picks for 2011 (at least for now!):
I believe that one can characterize this list as having a value-tilt or contrarian perspective once again. I fear that I may not be aggressive enough, especially since I expect stocks in general to rise 20% in 2011. Here are some characteristics of my picks (using the weightings of the Top 20 Model Portfolio):
- 2010 Price change: -3.9% (+1.4% median)
- Forward PE: 16X (12.9X median)
- P/TB: 1.6X (2.0 median)
- Net Debt to Capital: 4% (17 of 20 have net cash)
- Market Cap: $17 billion (median $1.2 billion)
The model itself is rather diverse, but no one will accuse me of being a "closet indexer". Our largest exposure remains in Industrials at about 31%. Technology has recently become the second largest exposure at 29% (compared to zero at year-end 2009).
After that, it falls off pretty quickly with Health at 13% (slightly above the S&P 500), Financials at 10% (below market - probably a mistake) and Consumer Discretionary at 10% (below market slightly). Last year, like the previous year, we were loaded up with Consumer Discretionary (6 of the 20 names).
We are also diverse by market cap, with the smallest name at $182mm but two names in the mega-cap category (>$100 billion). I like Large-Cap Health and Technology and own 2 large-cap names in both sectors. Our other Large-Cap name is in Financials. The rest of the portfolio is in Small-Cap and Mid-Cap. Many of our smallest names are in Industrials.
After producing static returns in excess of 50% in each of the past two years, do I expect to do it again? I currently expect that these 20 stocks will have an average price return of 47% if they all hit my one-year out targets (they range from 29% to 92%). With the weightings of the model (ranges from 2.8% to 7.5%), that return is about 49% - just shy. I am sure some will do better and several will do worse. I only hope that this year we can do better in the model than this list! Good luck in your investing in 2011.
Disclosure: Author has personal holdings in CHS, CSCO and TECUA