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All Star Portfolios: Still Swinging at Midseason (Cont'd)

Don't miss the first half of this column.

Mr. P's Theory Pays Off

The suggestion from wily hedge fund manager Mr. P. on Jan. 10 (" Why the Smart Money is Buying Now" ) to start buying large-cap stocks that had been hammered recently despite 10 years of strong growth and solid cash flow also panned out. I screened for stocks fitting that profile and came up with a list of 10 stocks he endorsed. They were up 9.1% by the end of June, vs. a 5.5% decline in the broad market. Leaders were the unlikely Cabletron Systems (CS), up 50.4%; Microsoft (MSFT - Get Report), up 49%; KLA-Tencor (KLAC), up 45%; and Tiffany (TIF), up 33%.

I'll let the original 10 ride, but I will also track this new gang of 12. Mr. P is short-term bearish for traders, but long-term bullish -- as he thinks that even if the market tanks over the summer, you're likely to still be happy in a decade if you salt away shares of bruised but proven winners. He says his original view, first uttered in January, is still true: "These are the levels at which the smart money buys."

Name 10-Year EPS growth % % Change 12 Mos.* Market Cap (in billions)
PMC-Sierra(PMCS - Get Report) 26.32 -83.6 4.9
Cisco(CSCO) 56.78 -71.8 140.0
Sun Microsystems(SUNW) 30.61 -64.2 51 .0
EMC(EMC) 60.51 -60.8 67.0
Waters(WAT)" 26.25 -57.4 3.5
Micron(MU) 69.57 -53.3 25.2
Silicon Valley Banc(SIVB) 23.36 -49.6 1.1
Charles Schwab(SCH) 43.32 -51.0 22.0
Applied Materials(AMAT) 43.92 -45.8 40.0
Cognex(CGNX) 23.01 -43.3 1.2
Dell(DELL) 50.12 -47.0 69.0
Altera(ALTR) 39.75 -43.1 11.0

We've Learned to Love Rejection

My favorite story of the year came on Feb. 14, when I showed that Standard & Poor's had ripped more than two dozen able-bodied value stocks out of its benchmark index during 2000 and replaced them willy-nilly with growth stocks (" Make a Bundle on the S&P's Rejects" ). I noted that the result was the opposite of what S&P intended: The expelled stocks did much better than their replacements. And guess what? It's still true: Stocks added to the S&P 500 in 2000 are down even more now than they were in February, with a 24.5% decline collectively since their individual additions. The expelled stocks are up 45% collectively since their banishment.

It would be presumptuous to think that Standard & Poor's took my critique to heart, but it's worth noting that they've expelled only two stocks so far this year for reasons other than mergers or spinouts: Briggs & Stratton (BGG) on April 2 and Longs Drug Stores (LDG) on June 29. The Briggs trade turned out as expected: It's up 14.5% since expulsion, double the market, while Longs Drug gained 7% in its first day of trading outside the index on July 2.

Calendar Streak Continues

My portfolios of stocks that do well in individual months have scored solid gains this year, too. Called HiMARQ -- for "historical monthly average return quotient" -- they beat the market handily in every month except February. Top picks included Ameristar Casinos (ASCA) in April, which is up 137%; McNaughton Apparel (MAGI) in April, up 45%; Barnes & Noble (BKS) in March, up 46%; Oracle (ORCL) in June, up 31%; and MedImmune (MEDI) in June, up 21%. Overall, I figure the HiMARQs are up 7.1% for the year. Here are the July prospects:

Stock Avg. July gain # up Julys # down Julys
Taro Pharmaceutical(TARO)" 8.4 6 1
Dynegy(DYN) 7.0 5 1
Fiserv(FISV) 5.6 11 3
First Virginia Banks(FVB) 3.9 11 4
Genzyme(GENZ) 6.7 10 5

The 2001 SuperModels

Hey, remember the supermodels? Flare-Out Growth, MVP Growth, the Redwoods and all those action-comic superheroes from my columns and books in 1998 and 1999? On my birthday in late February, I dove into the icy gloom of the market to create a 20-stock SuperModels portfolio (" Ready or Not, Here Come the 2001 SuperModels" ). It's really my only growth- and momentum-focused model this year, and it was up 8.2% through the end of June, vs. a 2.3% decline in the broad market. Pow! Take that, bears.

Leaders are Cardinal Health (CAH), up 57%; Alza (AZA), up 29%; Loews (LTR), up 27%; and Bed Bath & Beyond (BBBY), up 22%. Anadarko Petroleum (APC), which was a powerful member of the surging energy group at the time, is actually down 16% since. I'll let these ride.

GARP and Sleepers

Speaking of blasts from the past, my GARP and Sleepers portfolio of April 17 also fared fairly well, with a couple of nasty exceptions (" 13 Below-The-Radar Picks with Potential to Soar" ). It was up 4.3% through the end of June, vs. a 2.7% advance in the market. Best names were Citrix Systems (CTXS), up 42%, and Pixar Animation Studios (PIXR), up 36%. Bombs were Tellabs (TLAB), down 45% if not for the 20% stop loss; and Atlas Air (CGO), down 49% if not for the stop. It's too early to create another set of these. I'll let these ride, too.

Batting Practice

Turning now to ideas presented in the column that weren't strictly models, we have:

Swings. My three swing-trading stocks on April 25 are up 21.7% collectively since, vs. a 0.5% advance in the market. They were led by an 84% advance in Sonic Automotive (SAH). First Health Group (FHCC) hung in with a 5% advance and Arch Coal (ACI) fell 24%.

Plants. Just after the second bottom of the market in early April, I passed along a money manager's comments that bear markets should be known as the "planting season," while bull markets should be called the "harvesting season." The seven stocks mentioned favorably are ready for reaping, with a 22% advance vs. a 6% hike in the market. Top names were Perot Systems (PER), up 83.9%; OrthoLogic (OLGC), up 31.6%; and Syntel (SYNT), up 27%.

Orphans. A day after the second bottom of the market in early April, I suggested that the problem with many old favorites was that they had been orphaned by growth-stock managers but were not cheap enough yet for the value folks (" Wanted: Homes for Orphaned Growth Stocks" ). A couple of value managers gave me six growth stocks they were pursuing, though, and they're up 39.6%, vs. 10% advance in the market. Top names are Network Associates (NETA), up 107.5%; J.C. Penney (JCP), up 77%; and Novell (NOVL), up 40%.

This will be a tough act to follow, but I'll get started in a week. There's always time to break a winning streak with a brand-new set of disasters.
At the time of publication, Jon Markman owned shares in the following equities mentioned in this column: Microsoft and EMC.

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