Assessing My Recommendations In 2011

by: Thomas Lott

I am not a writer. I am a trader and investor. I love finding cheap and unloved stocks, and at my core resides a deep-value contrarian investor. When everyone hates an idea, I start to get excited. But at the end of the day, if I cannot outpick stocks in the market, then I should hang up my hat and quit. Because the truth is, retail investors like me are the worst in the world.

Numerous studies show that retail investors cannot beat the market, and in fact underperform even when they are in well picked mutual funds. The problem is trying to time the market. Retail investors panic at the bottom, and buy at the top. It seems cliché, but it’s still true to this day.

John Bogle, founder of indexer Vanguard, constantly rails on the underperformance of actively managed mutual funds. In his book Enough, he showed that the average mutual fund returned 10% from 1980 to 2005, compared to 12.3% for the S&P 500. The bigger problem was that the average fund investor, either from chasing hot funds or buying high and selling low, performed even worse. They earned 7.3% per year, which is 5% lower per year than the index. That means that $10,000 would be worth $58,200 for the average investor, but had they not traded their mutual funds, that same $10,000 would be worth $108,350. An investment in the S&P would be worth $181,750! That 5% difference really adds up.

Last month when legendary investor Bill Miller stepped down from managing the famous Legg Mason Value fund, The Washington Post did a little math to see how he had done compared to his investors. While the fund itself made 16.44% a year during his hot streak (from 1991 to 2005), investors in the fund only made 11.34%. Selling at lows and buying tops had terribly negative bias. The S&P over that same period was up 11.51%.

The person who overanalyzes the fees in funds, the 0.5% or 1.0% fees, likely is the one who under-analyzes the negative impact that bad trading decisions will make. Losing 5% a year by buying high and selling low makes a 50 basis point difference in fees look paltry. So, to me the takeaway is, when you feel like selling a stock, it’s probably a buy, and when you feel like buying a stock, it’s probably time to sell.

I began publishing here because frankly, the market seemed to be offering up lots of tidbits of cheap equities. Here is every long or short idea in order, and how it did this since recommending it. By the way, I bought every single one of these names at these prices too.

Greenlight Capital (NASDAQ:GLRE). I recommended buying GLRE at $21.75. Star investor David Einhorn runs the float from this insurer, and his track record is unequaled. The stock got crushed in the summer by almost 25% from its peak on the fear that its book value would fall with the market. While the S&P was down 13% in Q3, Greenlight’s portfolio was flat, the market bid up the stock a little after Q3 numbers came out. This is my biggest position, and today it’s up 8.7% since buying and recommending it. There is still significant upside however if the market doesn’t totally crumble.

Raymond James Financial (NYSE:RJF). This conservative investment bank sold off with every other financial 35%. RJF is only 4x levered however, compared to BAC and JPM which are 15-20x levered (using tangible book), and its similar performance was completely unjustified. I recommended buying some at $25.50, and today it’s at $31.40, up 23%.

Family Dollar (NYSE:FDO). At $50, I recommended initiating a position based on the fact that Bill Ackman was a deep buyer in the mid to high 40s, and Nelson Pelz’s firm Trian Capital had actually bid to buy the company for $55-60 a share. Today it’s at $57.79, up 13.3%. To be honest, I sold it at 58.65. I think the 2 year upside is to $67 a share, and the downside to $46, so the risk reward perhaps isn’t as good now, but below $55 I will look to get back in.

Bank of America (NYSE:BAC). After Warren Buffet made his $5BB investment in BAC preferreds, I started to dig deeper to see if this stock made sense to own. At $7.00 a share, I concluded that it was worth buying at $5, as the downside is still quite real. I wrote that BAC could easily fall to $2 a share, but could trade to $12 on the upside. Well, it did fall to $5, for approximately an hour earlier this month, but I did not buy it as I wasn’t quick enough to pull the trigger.

YPF (NYSE:YPF). YPF is an emerging markets oil and gas producer, the biggest in Argentina. I recommended buying some at $35.41, and it has traded with tremendous volatility as I expected. Including the $1.67 dividend, this name is up 4.7%. This might be one to pare back, capital flight from this country, and terrible inflation will perhaps make this a challenging place to invest in 2012. On the plus side, YPF announced a discovery of almost 1BB barrels of oil from unconventional shale acreage. Considering that total company reserves before this were also around 1BB BOEs of oil & gas, it’s a significantly positive announcement.

Berkshire Hathaway (NYSE:BRK.A), (NYSE:BRK.B). Buffett had a tough year in 2011, as BRK traded quite poorly after the David Sokol scandal. At $71, it looked like Berkshire was trading at 11.5x earnings, compared to an S&P multiple of 11.6x. Why would the market ascribe a lower multiple to the best investor of all time? He isn’t gone yet, and I believe that the upside is around $97 a share, with a nice floor in the mid 60s. His buyback plan will provide up to $28BB of cash to keep the stock from falling too much. It is now just under $77, up 8.5%.

Annaly Capital (NYSE:NLY). At $16, I wrote that NLY is trading right at book value, and historically when this name trades to 1.0x book or lower, it’s been a strong buy. The stock is still around $16, but with a 57c dividend, the total return is 4.0%. As long as Fed Funds stay at near zero percent levels, this is a stock that can make money, albeit less money as the firm is smartly paring back leverage and waiting for better entry points in agency mortgage paper.

Apple (NASDAQ:AAPL). I haven’t traded much in Apple this year as I bought it last year, but recommended the stock when earnings disappointed Wall Street this Fall. I suggested adding more shares in the $360-380 range, and selling it at $475 give or take. At $405, its up 9.5% from the midpoint of that recommendation.

Hewlett Packard (NYSE:HPQ). The management flops at this company in 2011 spelled disaster for holders here. While there are lingering problems with product and lower ROE’s in HPQ’s computer businesses, I think investors fail to see the value here. I recommended buying HPQ at $25, and still find this to be an attractive turnaround play. Non-GAAP EPS from 2008 to 2011 are: $3.25, $3.14, $3.69, $3.32. Guidance for 2013 FY ending October is $3.20 on a GAAP basis and $4.00 on a Non-GAAP basis. I argued that investors should care about cash based earnings, which are closer to the non-GAAP reported numbers. $4 per year in FCF per share should equate to a mid 30s stock. HPQ is up 3.3% since recommending it and I like owning it next to Seth Klarman’s Baupost at similar prices. It is Seth’s second biggest position in fact.

Vodafone (NASDAQ:VOD). I just recommended buying VOD on December 1st , a name that I traded last year too. It is far better than Verizon (NYSE:VZ), and eventually the market will figure this out. I paid around $27, and today it is trading at $27.91 up 3.4%.

Sprint (NYSE:S). For the speculative investor, Sprint could be quite interesting. With the T-Mobile/AT&T deal falling apart, I wouldn’t be surprised if S and T-Mobile gave it a go. I am not sure how you combine a GSM network with Sprint’s CDMA architecture, but clearly there are synergies here somehow. At $2.45, you know your downside, but I think in 2-4 years S could be worth up to $9-12 per share. The stock is down a dime now at $2.34 today.

Cablevision (NYSE:CVC) options. CVC got killed after their COO left the firm last month. There is a ton of debt here, which means the stock will also move a lot over the next year. I recommended options to protect your downside. It’s not a great buy and hold stock with the Dolan family at the helm. The calls are up 40% however as the stock has bounced a little since its shellacking in November.


Not hanging up my hat yet. Managing money was tough this year, but I suspect we will see one or two panic riddled tapes that should provide better entry points. And while I made a little money this year, I at least avoided the meltdown in Emerging Markets and Europe, two areas that probably will probably soon be strong buys. Emerging markets look to end 2011 down 20%, and Europe down 16%. Waiting and watching there.

Disclosure: I am long CVC, S, VOD, AAPL, NLY, BRK.B, YPF, RJF, GLRE.