Sunday, November 11, 2007

Two Valentine's Day Portfolios: Heartbreakers or Tried & True?

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I am having a running discussion with an investor interested in the future "real" mutual fund via email, on the merits of buying stocks with relative strength versus those who have been taken out behind the barn and shot. It is an interesting thought process, and I am wondering what a basket of each type of stocks would show in terms of performance after 1 quarter. So, in the spirit of the ever popular post "12 Stocks to Buy on the Next Pullback", I decided to make two baskets of stocks that look interesting now, and we can check back to see how they are doing in 90 days - right around Valentine's Day. With the market down of late, we can clearly see a distinction between those stocks that have crashed and those holding up well. So it's a good time to test this, and in the spirit of the holiday, I am going to call the relative strength basket "Tried & True" (TT) and the smashed stocks "The Heartbreakers" (HB)

I will try to break these stocks down by sectors, although there will be some wildcards - each portfolio will have 10 names - I own all but 1 of these; I will use Friday's closing price.

First you always need an agriculture stock - it is hard to find a true Heartbreaker in this group since it has held up well, but agricultural equipment maker CNH Global (CNH) is down 10% from last week's highs, so it will qualify. Tried & True? Any of the 3 major fertilizer stocks I vouch for on a nearly daily basis.

HB: CNH Global (CNH) $60.81
TT: Mosaic (MOS) $71.04

My other favorite sector is the infrastructure group - again very hard to find a true Heartbreaker but Fluor (FLR) has crumbled from the $170s to $140s and now is below a key technical support level, the 50 day moving average. Tried & True candidates would be Foster Wheeler (FWLT), Chicago Bridge & Iron (CBI) or Shaw Group (SGR)

HB: Fluor (FLR) $140.43
TT: Foster Wheeler (FWLT) $150.77

Next we go to big cap tech, what I like to call the teflon stocks, which until this week was full of Tried & True's. Golden child VMWare (VMW) has tanked on the typical "the end is near" talk now that some other companies have tried to buy smaller companies somehow related to virtualization and of course they will be eating VMWare's lunch - of course (sheesh can't we let companies thrive for more than 1 quarter before we start talking about the end of their competitive advantage?). With the stock breaking its near term support of the 50 day moving average it has Heartbreaker written all over it. In the other camp, we have the 'horseman': Apple (AAPL), Google (GOOG), Baidu.com (BIDU), and Research in Motion (RIMM) - all in nearly identical spots - pulled back some here in the past few days but up until Tuesday showing no weakness. Any could be chosen, but I chose Google since it is still the farthest from its major support (50 day moving average)

HB: VMWware (VMW) $87.74
TT: Google (GOOG) $663.97

Next we need a networking stock - oh how the mighty Cisco (CSCO) felled many trees - many candidates in the heart breaker category but I am going to go with the fallen Blue Coat Systems (BCSI) - this poor company has not even reported its earnings but has been shellacked by the "perceived" bad news from competitors Riverbed Technology (RVBD), F5 Networks (FFIV), and Cisco. On the plus side is Ciena (CIEN) which has held up reasonably well, and since they sell into telecom customers instead of enterprise, this seems to have allowed the stock to hold up reasonably well.

HB: Blue Coat Systems (BCSI) $31.36
TT: Ciena (CIEN) $44.36

We need a sexy solar stock, certainly the hottest part of the market the past month. Very easy to pick our darlings in this sector - the hottest stock on the planet vs the one dogged by accounting issues.

HB: LDK Solar (LDK) $40.42
TT: First Solar (FSLR) $206.85

We need a (non solar) energy type of play as well - a couple of great candidates for Tried and True such as Core Laboratories (CLB) or CGG Veritas (CGV), but I am going with a refiner of all sectors - Frontier Oil (FTO) a company which amazingly was able to increase profits in an incredibly harsh environment for refining last quarter - how reliable is she? As for heart breakers we have a few candidates as well but I am going to go with National Oilwell Varco (NOV) which has peeled off 13% despite a heck of an earnings report.

HB: National Oilwell Varco (NOV) $71.13
TT: Frontier Oil (FTO) $46.22

Next we need a financial. Wait, did I just say that. Gulp. I do have 2 great Tried and Trues in Mastercard (MA) and Blackrock Financial (BLK) - but with the former possibly enjoying the extra benefit of the hype around a VISA IPO and the latter potentially losing its CEO to Merrill Lynch, this is an easy choice. As for Heartbreakers? Umm, I have a list of about 100. The easy choice would be Goldman Sachs (GS) but I am going to go out on a limb and pull out of the dark (drumroll) Morgan Stanley (MS). Why? Goldman has yet to admit any write downs - granted they could of pulled off the best financial gyrations of all time, but somehow I don't think so [Goldman's Blowout Quarter?] So perhaps some of their teflon comes off in the coming quarter. Now, with Morgan Stanley making a 3 month call in this sector is a tough one. If it were 4 weeks I'd feel more comfortable as financials seem very oversold, but I do believe after a rebound, more bad news will be out by early next year. Hence any heartbreaker will probably just continue to break your heart - but gun to head, with (in theory) only $6 billion more that could go wrong, and a CEO that actually has some respect - MS it is.

HB: Morgan Stanley (MS) $54.20
TT: Mastercard (MA) $193.00

So that gives us 7 sectors in which we have ying and yang, direct comparables to put into each basket. For the last 3 names in each group - it won't be so clean a comparison

The remaining 3 Heartbreakers will be a retail stock (a sector breaking many hearts on the street lately), a dry bulk shipper (breaking many a heart the past 2 weeks), and a smaller Chinese stock (also breaking hearts the past 2 weeks).

HBs: Crocs (CROX) $38.49, Excel Maritime Carriers (EXM) $51.47, WuXi PharmaTech (WX) $28.51

The remaining 3 Tried & True? Let's go with some US coal, some Russian coal/iron, and some Indian copper. So a bit commodity play - of course at risk in all names if the global growth story slows down over the next few months... but thus far all have held up very well.

TTs: Consol Energy (CNX) $55.96, Mechel (MTL) $85.02, Sterlite Industries (SLT) $23.61

So there you have it; two portfolios of 10 names each - we'll check back in 90 days to see who is giving us some loving and who left us at the curb. Do we want to buy the fallen angels or those who never waver? Keep in mind for those technicians out there, almost none of these Heartbreakers would be 'technical' buys until they fall quite a bit more... so we might be early on buying any of these.

Enjoy!

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