Stockpickr

Return to Article

Stockpickr: How to Win a Stock-Picking Contest

James Altucher

If I were to enter one of the many stock-picking contests out there (including TheStreet.com's own contest in a few weeks), here's how I would try to game it.

Simply put: You want stocks that are most likely to make quick moves in short periods of time, because most contests don't last for more than a couple of months.

On Stockpickr, we set up a portfolio called How to Win a Stock-Picking Contest, which contains a list of possible stocks for the CNBC challenge that's currently running. I plan on updating this portfolio column many times to identify the latest fallen angels that make for good contest stocks; watch for those columns and more information about TheStreet.com's own stock-picking contest.

I would also suggest you take a look at the portfolio of top potential short squeezes for additional stock ideas.

There are three types of portfolios/stocks that are most likely to have 200%-plus moves in a short period of time, which is what you should be looking for when entering a stock-picking contest:

• Focused portfolios. That is, portfolios with only one to five stocks. Having even 10 stocks might be too diversified for this type of game.
• Beaten-down stocks that are well off of their highs. Any good news at all will send these stocks up 300%. This is why Enron, for instance, actually went up 300%-plus on 1 billion shares of volume the day it declared bankruptcy.
• Low-priced stocks, trading for less than $5. It's irrational that these stocks are more likely to go up 300%, but it's certainly possible.

Furthermore, I like stocks that can count master investors as holders of them. For instance, there is Cyberonics(CYBX Quote), which is held by Carl Icahn. The stock is 33% off of its highs because it remains unclear if its depression-treatment system will have any material effect on patients.

That said, if this stock should hear one piece of good news, it will get pushed up past $30. Icahn tends to bottom-fish, which explains his preference for stocks such as Cyberonics. Take a look at Icahn's portfolio on Stockpickr.

Another interesting stock to consider is Accredited Home Lenders(LEND Quote). Like all the subprime mortgage players, this stock has been obliterated of late. I can't really think of anything good to say about it. If what you want in a lender is credit quality, Accredited Home is not for you. Delinquencies at the company have increased, with the ratio of loss reserve to principal outstanding going from 1.4% to 1.7% last quarter. That number should probably be as high as 5%, but that would destroy Accredited Home's short-term earnings and affect its ability to obtain credit facilities.

That's an ugly chart. But you want ugly in a stock-picking contest, particularly a contest that lasts just two months.

If you want credit quality in your portfolio, then you should go with U.S. Bancorp(USB Quote), which is one of Warren Buffett's new holdings. The company's credit quality actually went up quarter over quarter, despite the housing bust.

Perhaps shares of U.S. Bancorp will go up 100% as well, but I bet Accredited Home is more likely to see that kind of increase. Shares of Accredited Home are trading near $16, on a quick move down from $60.

Hedge fund Second Curve Capital, run by Tom Brown -- a top portfolio manager for investment guru Julian Robertson before Robertson retired -- has a large stake in Accredited Home. Second Curve is getting destroyed by the media of late, but like many things, it's not as bad as it seems. The fund was up 60% last year; now it's down about 10%. That's pretty bad, but it's had periods like that before and has been able to recover.

Second Curve specializes in specialty finance, and lending to subprime borrowers is considered a specialty. The fund has come out and said that it stands behind these lenders and is not bailing. I would argue that all of the stocks in the Second Curve portfolio are for sale now.

Another interesting name to own in a stock-picking contest is Crystallex(KRY Quote), which engages in the mining and processing of gold, primarily in Venezuela. The stock has been hit hard ever since Venezuela decided to start nationalizing oil interests, although it's worth noting that President Hugo Chavez has said nothing about gold companies. As long as a company is producing gold, the general theory is that Chavez will leave it alone.

Something else worth noting about Crystallex is that is a Canadian company, not an American company. I don't have much experience in these matters, but my lawyer happens to own part of a gold company in Venezuela that's right next to some of the Crystallex properties, and he doesn't seem worried.

When you want to win a contest, you don't have to care about how the company is going to do in 2010. You only need to find beaten-down companies that have a chance at seeing good news, causing a 100% pop.

Jennison Natural Resources holds shares of this stock. The fund is up an annualized 32% per year over the past three years. Let it worry about the nationalization risk; you just want to win a contest.

We will update our contest stocks portfolio on a regular basis, most likely every day. To be notified when the portfolio is updated, just bookmark it by rating it with four stars. Again, the purpose of this portfolio is not to produce winners in every stock but to find stocks that have the most potential for an explosive move upward. Other portfolios worth looking at include stocks with unusual options activity and stocks at their 52-week lows.