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Sharek’s 2011 Review

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2011 started strong, ended weak, and left us with portfolios up-slightly on the year holding stocks that should perk up in 2012.

2011 Returns

Through the first quarter of 2011, we were up more than 15%! The Aggressive Growth Portfolio was leading — up 24%. The Growth Portfolio was up 17%.

At the time I thought we had a chance to be up 40% for the year. I’ve had years like that before. The Growth Portfolio was up 41% in 2003 and 42% in 2007. The Aggressive Growth Portfolio was up 45% in 2007.

But then by year-end, 2011’s big gains went away. As it was in 2008, bad news wore the portfolios down by the end of the year.

I thought December 2011 was going to be fun, but it wasn’t. I figured we would have a solid end to the year because the world political unrest had died down. But The European financial crisis kinda sucked the air out of my top stocks (they then rebounded higher after the first of the year, but little does that help me now cuz my returns are shot).

In 2011 the stock market was flat. I mean totally flat — a zero percent return. By winter my hopes of a 40% year turned into “if I can at least beat the market by 10%”. But that didn’t even happen. During the last week of the year my stocks had run out of gas, and rolled into the station on fumes. The Growth Portfolio finished the year with a 2% gain, the Aggressive Growth Portfolio was up 6%.

Comments on Certain Stocks

The first half of the year was great for growth stocks. Then the market shifted into more value names and the high-flying growth stocks like Travelzoo (TZOO) and SodaStream (SODA) fell down. Both of these stocks went way-up then way-down. It’s easy to look back and say I shoulda done this-or-that but I’m a long-term money manager and believe in letting companies grow. The problem was each company lowered profit estimates. Had business continued to accelerate, the stocks would likely be higher. I have since sold SODA and still have TZOO, which I bought at $47, watched poke through $100, and hold at $27. Making the call on what to do with TZOO when it was high was a big decision for me in 2011. At the time the stock was around $100 annual estimates were flying higher so you didn’t know how much TZOO was going to make. The stock could have been in the beginning of a miraculous run. I had to hold — the decision was correct. The outcome wasn’t.

I’m not looking to trade in, trade out. Sometimes this works. In 2010 Green Mountain Coffee (GMCR) was under stress by an SEC inquiry into GMCR’s revenue accounting. When the dust cleared the stock ran from the $20s to more than $110. Since I had been holding GMCR since $9 we were up ten-fold. But at the time of the stock-drop I could have sold. Almost sold. But I didn’t. I held.

In 2011 GMCR bucked under stress on accounting allegations by short sellers who were smart enough to figure out the company channel stuffed, had a big quarter, then would go on to miss revenue estimates the very next quarter. The shorts were right. Now I feel a solid quarter coming for GMCR, which is around $47.

Portfolio Holdings

Here’s what really happened last year: the stocks I was lightly invested in — or really not hot on — went way higher than they should have. The stocks I had a lot invested in — the ones with more upside potential — didn’t go up as much as I thought. For instance Chipotle (CMG) and Intuitive Surgical (ISRG) were selling close to their fair values during the year, so I didn’t have a lot in these stocks (I had been selling CMG, I just don’t remember when). In 2011 CMG rose from $218 to $338 (+55%) and ISRG went from $258 to $463 (+79%). By year-end CMG was still only a 5% holding in the Growth Portfolio, ISRG was only 3%. Neither was in the Aggressive Growth Portfolio at the close of business, circa 2011.

The problem I’m having is the top three — Apple (AAPL), Priceline.com (PCLN) and Baiducom (BIDU) — comprise 60% of the Aggressive Growth Portfolio and 50% of the Growth Portfolio but these three didn’t go up as much as they should have. These three stocks look so much better than the rest. It isn’t even close.

When CMG doubles, AAPL doesn’t, and SODA goes down, you end up with slightly-positive returns. How boring.

Shift in the Market

It’s really easy to see the United States of America is the best place to have your money (I just got shills writing that). That’s good news. I can keep up with the stocks over here. Plus, you can trust American companies more than International ones. Some smaller Chinese stocks have been hammered the past couple of years for cooking the books or not coming through with expectations (promises). My record with International stocks was great in the decade of the 00s, but has turned lousy in the decade of the 10s (that’s just my opinion, no numerical evidence has been used in this thesis). I think its because the good stocks are here in the US.

During the first half of 2011 growth stocks ruled. Then when the money shifted away it usually looks for places that haven’t been in the spotlight for a while and that are good values. I think the place to be right now (other than AAPL, PCLN and BIDU) is conservative Dow-type stocks. Right now Exxon Mobil (XOM) has  P/E of 10 (plus a yield of 2%). Microsoft (MSFT) has a P/E of 9 (plus a juicy yield of 3%). You can pick up some IBM (IBM) — which Warren Buffet just invested in — for 12 times earnings and get paid 1.65% a year to hold it.

2012 will be the Year of the Dow.

The Market’s Cheap

The stock market’s really cheap right now and I think these conservative stocks (which are often Dow stocks) will have a big year. Today. the S&P 500 is selling for 13 times 2012 earnings. It should be selling for 16 times earnings. That’s a 23% gain if these numbers work out. MSFT and XOM are each worth 12 times earnings. A 20-25% return would get them there.

For me the negative about buying/owning these value stocks is I would miss out on growth stocks — and these have the opportunity to pop more than the Blue Chips. After I develop my spreadsheets on XOM/MSFT/IBM and look at the numbers and charts, I see boring stocks that won’t move much. There’s just not enough profit growth to mount a solid gain. XOM’s profits will be down this year, so how’s the P/E going to rise when profits are falling?

I don’t know why nobody else is talking about this but the market could go up 25% this year. In my opinion, it should.

2012 Gameplan

My gameplan for 2012 is to

  • Keep the larger investments in the stocks I feel have the most upside — namely (currently) AAPL, PCLN and BIDU.
  • Accumulate more stocks like Cognizant Technology Solution (CTSH), which I bought for the Growth Portfolio during December. CTSH is a consistent 20% grower I can count on. The stock’s selling for 20 times earnings, I think its worth 25 times earnings and that would be a gain of 25% — without taking unnecessary risk.
  • Locate a few smaller cap stocks that have been overlooked by big money managers who have to get approval to buy before they invest.

If I can get the big holdings to pull their weight, invest in a couple of small/mid caps that pay-off, and get the stable stocks we hold to provide 20% with certainty, then its going to be a fun year.

David Sharek David Sharek is stock portfolio manager and CEO of DavidSharek.com. David believes a company's profits ultimately drive the price of its stock. His book The School of Hard Stocks can be found on Amazon.com.