Being a Great Stock-Picker, Part 2

Do you want to be a great stock-picker? They do exist, to be sure, as I explained in Part 1 of this column last week. In this, the second part of this two-part column, I'll highlight the one overriding imperative required to be a great stock-picker: seeing what others don't see.

Align yourself with the crowd and you're doomed to mediocrity. In the distribution of outcomes, the crowd will always be average. There is only one way to avoid being average, and that's to act unlike the average. How do you get there? It requires a contrarian bent, an analytical framework that constantly questions conventional wisdom. In short, great stock-pickers don't accept the consensus view. They see the mistakes made by the general consensus regarding specific stocks.

Here are some examples of both past and current mistakes made by the consensus.

J.C. Penney

When I recommended J.C. Penney (JCP - commentary - Cramer's Take) to RealMoney readers in December 2000, it was trading at $10.25. It closed 2004 at $41.40.

The consensus opinion was that J.C. Penney had an intractable disadvantage to newer up-and-coming retailers such as Kohl's (KSS - commentary - Cramer's Take). As I mentioned in the original column, though, there was more to the J.C. Penney story than lagging department-store sales. I mentioned the new leadership under turnaround expert Allen Questrom (who retired on Dec. 22, 2004) and the value of the Eckerd chain to J.C. Penney shareholders, "worth about $10 per share, or what J.C. Penney is trading at today."

Commerce Bank

Numerous analysts have criticized Commerce Bank (CBH - commentary - Cramer's Take) for its large mortgage-backed securities portfolio. This criticism was also levied against Commerce in a negative Barron's article on July 31, 2004. Should a skilled stock-picker take the large mortgage-backed securities (MBS) portfolio criticism at face value?

At first glance, Commerce has a larger MBS portfolio than other banks do. But a more thorough appraisal of the issue reveals the criticism to be superficial.

Commerce can't be compared on an apples-to-apples basis to other banks on this issue. Commerce is the envy of the industry with its de novo growth, as deposits are growing consistently more than 30% per year. That money has to go somewhere. The causal link here (for the large MBS portfolio) is the conservative credit culture at Commerce. Excess cash from deposits goes into securities instead of aggressive lending, a far riskier strategy.

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At time of publication, Alsin and/or ACM was long Commerce Bancorp and Blockbuster, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail].