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UCLA Investors' Three Best-Performing Holdings

Stockpickr Guest Columnist

Each January, the 10 "fellows" of the UCLA Student Investment Fund (SIF) are given a preapproved list of about 150 companies that they may invest in. Current SIF fellow Daniel Aobdia says: "This approved list evolved as the result of all the previous SIF fellows' analyses. We have flexibility to remove stocks from the list or add new ones at the beginning of the program as well as during the year. Therefore, the approved list we will hand over to incoming fellows will be significantly different than the one that was handed to us."

To add and remove stocks from the list, SIF fellows need to perform a stock analysis and a present a "write-up." The SIF stock write-up is a fixed template (usually two pages) composed of:

• General stock and financial information about the firm.
• Business description.
• Investment thesis, including stock valuation .
• Investment risks .
• Overall recommendation and price target.

The aim of the write-up is to communicate whether the group should one day buy the stock or not, or sell it in the case that they hold it. To actually make a change to the list, group members must obtain approval from other SIF fellows and the SIF's faculty adviser, Professor Bill Cockrum.

Aobdia says, "More than 10 stocks have been added to the approved list this year," including two stocks that he wrote up: Chiquita Brands International (CQB - Cramer's Take - Stockpickr) and The Kroger Company (KR - Cramer's Take - Stockpickr).

Aobdia explains his additions: "Chiquita because of the rise in commodity costs. The company is well-positioned to benefit from this rise in the future. Another positive point is the current turnaround of operations. I pitched Kroger but did not buy the stock. I believe the company has pretty good prospects on a long-term basis -- better than its traditional competitors in the supermarket space. However, I felt that the timing was not right in terms of buying the stock, partly due to the U.S. economy slowdown, and I am still waiting for a good price window to buy."

The SIF's Best Stock Picks of 2007

Of the SIF's approved list of names, the group currently holds 43 stocks spread over two equity portfolios: 18 stocks in a portfolio of value plays and 25 stocks in a growth-oriented portfolio.

The current three best-performing stock holdings: Apple (AAPL - Cramer's Take - Stockpickr), Express Scripts (ESRX - Cramer's Take - Stockpickr) and Berkshire Hathaway (BRK.B - Cramer's Take - Stockpickr).

Why Apple? The SIF bought Apple in May when the stock was trading around $105. According to Aobdia, Bryan Applequist and Erik Gulsrud, the two student analysts who cover Apple, picked it because of the company's "track record of successful product innovation" and felt this year would be "a standout year for new product potential, which would help fuel momentum behind the stock." Aobdia added that Apple "consistently beat earnings estimates , and we counted on management's ability to continue to do so for strong near-term performance."

Why Express Scripts instead of Medco Health Solutions(MHS - Cramer's Take - Stockpickr)? Erik Gulsrud, the SIF fellow who covers Express Scripts, which traded around $49 when the group bought it, explains: "I see Medco Health and Express Scripts as being very similar (although Medco Health is clearly larger at this point), and my call on Express Scripts was more of an industry call than picking the industry winner.

"I also felt that Express Scripts would gain momentum after failing in its effort to acquire Caremark, and I felt that the stock would see a nice appreciation in the short term following the CVS-Caremark deal (CVS - Cramer's Take - Stockpickr). ... Overall, I feel Medco Health is a great buy right now in general -- since they are saving money in an area where costs are spiraling out of control -- but in the end, I made a decision between the two based on which [company] I was more familiar with. With our short time frame for managing the money, I think it is important to go with companies you know well."

Why Berkshire Hathaway for around $3,600? Tim Davidson, the SIF fellow who covers Berkshire Hathaway, says the reason he bought the Warren Buffett-run company in May when the stock was trading at around $3,600 is that Berkshire "seemed priced to perfection without appropriate risk premiums ." Davidson added that on the basis of a "sum-of-the-parts analysis," Berkshire appeared undervalued .

The SIF's Benchmarks

To judge their investment performance, the SIF managers use two indices as their benchmarks : the Russell 1000 Growth Index for their growth portfolio and the Russell 1000 Value Index for their value portfolio.

According to Aobdia, the value portfolio is doing extremely well. He says that as of December, the value fund has outperformed its benchmark by about 14%. On the other hand, the growth fund's performance is more in line with its benchmark, underperforming it by a small 0.1%.

Dodging the Subprime Bullet

When the SIF fellows performed their economic outlook in the spring, some financial companies, such as HSBC (HBC - Cramer's Take - Stockpickr), warned of lower earnings. Davidson recalls that at the time, they "could not find many compelling values in financial stocks." The fellows understood that the subprime mortgage situation would probably have a negative impact on financials stocks, so they began to underweight their positions in financial institutions.

The SIF's suspicions were confirmed during the subsequent months.

Two exchange-traded funds (ETFs) that track the performance of the Russel 1000 Growth and Value Indices are the iShares Russell 1000 Growth Index (IWF - Cramer's Take - Stockpickr) and the iShares Russell 1000 Value Index (IWD - Cramer's Take - Stockpickr).

Plus, to learn more about benchmarking, check out "A Primer on Benchmarking Your Investments" and "How to Measure Your Investment Performance."