For the 3rd consecutive year, I began 2011 by sharing my Top 20 Model Portfolio as well as my Conservative Growth/Balanced Model Portfolio with my readers at Seeking Alpha. Unlike the previous years, where I felt like I had coached Super Bowl teams, I was highly disappointed with my beginning-of-the year picks from 2011. While I was able to overcome partially the poor hand I dealt my subscribers, squeaking out a gain relative to the benchmark for the CG/B model but still trailing for Top 20, I really struggled this year from April through the end of the year. I will share my models again in the very near future, but I want to first review last year's picks.
Top 20 ended up lagging the S&P 500 this year after trouncing it each year since the 2008 inception. The model returned -3.1% compared to the S&P 500 returning 2.1%. One of the obstacles was that Small-Caps lagged Large-Caps this year, but the real issue was some really bad picks. Here are the stocks that were in the model at the beginning of the year (click to enlarge images):
Looking at the picks, sorted by return, Synovis Life (NASDAQ:SYNO) soared late in the year after receiving an acquisition offer from Baxter (NYSE:BAX). Frankly, this was one of the few bright spots in my year, as this was a position that we began adding in mid-2009 and took a bit longer than I expected to play out. While a few others proved to be winners, at least marginally, in 2011, I had more than my fair share of dogs, with over 1/3 of my picks losing 20% or more. What happened?
While two of the bigger losers were Large-Cap, the other five were on the smaller side. St. Jude (NYSE:STJ) soared to an all-time high early in the year after a bullish analyst day (and we did sell it), but it then sank to a multi-year low amid concerns over the safety of one of its devices. We also sold AMAT early in the year on a strong move up. It sank in the year after making what appears to me to be an poorly-timed and expensive acquisition.
Multi-Fineline (NASDAQ:MFLX) struggled with slowing customer orders from RIMM and the failure of a new customer to ramp. Kimball International (KBALB) had some challenges in its EMS business - this was deep value BEFORE the 27% decline though. Comstock Resources (NYSE:CRK) was hurt by plunging natural gas prices. I had been hoping that it might be an acquisition candidate. Skechers (NYSE:SKX) was another deep value name that got cheaper. I knew that they had a problem with inventory (that's why we had added the name in late 2010) and expected them to work out of it (and they did). Finally, Tecumseh (TECUA) was another deep value (and turnaround) name. Fortunately, we exited the name before the plunge that took place after they reported their Q2.
So, unlike a year ago, when I ended up struggling to keep up with my initial picks, this year I was fortunate to prevent an even worse outcome through repositioning. Still, I walked into a couple of other landmines along the way. Too much focus on small turnarounds was the primary reason my picks stunk One of the things I have learned over many years is that it's not possible to always be right, and I recognized a lot of errors along the way in 2011.
The Conservative Growth/Balanced Model stocks fell on average by 2.8%. Fortunately, the model was able to perform much better due to repositioning throughout the year, returning 5.2% compared to the benchmark of 60% S&P 500 and 40% Barclays Aggregate Bond returning 4.4%. With a mandate of "capital preservation" and not just growth, it was, quite, frankly, a little easier to run this model. In a year that ended up doing "nothing", I was able to sell some stocks when they rallied and buy others on weakness. In all, the equities in the model performed better than the S&P 500, but I attribute that less to my picking skills this year than to a preference for dividend stocks. We carried a lot of cash this year (in lieu of bonds) and were overweight stocks (which are capped at 75% of exposure) and underweight bonds (which are floored at 10% of exposure) the entire year. Here are the picks from the beginning of the year:
Looking at the picks, sorted by return, we had just three stocks down more than 15%. Walgreen (NYSE:WAG) had moved to a nearly four-year high early in the year, and we were fortunate to scale back the position. Still, we went along for the ugly ride brought on by its contracting dispute with Express Scripts (NASDAQ:ESRX). Met-Pro (NYSE:MPR) was an enigma to me, as it did what I expected fundamentally. Unfortunately, the valuation was hit by PE compression. In retrospect, I guess it was too expensive. This is one that I had hoped might benefit from a more robust M&A environment. Finally, I addressed AMAT above. While we sold it out of the model, I erred in adding it back just before the disastrous acquisition was announced.
So, 2011 won't make it onto my career highlights film! The picks I shared a year ago were made in the context of optimistic assumptions regarding U.S. Equities that seemed to be on track even as late as early July. I covered some of the worst performers, but I am happy to address any others in the comments section if you should have any questions. Happy New Year to you!
Disclosure: Some of the stocks discussed are held in models at Invest By Model