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All-Star Portfolios: Still Swinging at Midseason

The second half of 2001 lies before us like the checkbook of a Major League all-star. Out there lies all the money in the game for investors who take the right swings -- and acres of pain for hackers who repeat the same dumb mistakes they made in the first half.

To stay ahead in your financial pennant race, it makes sense to take a short break to analyze brokerage statements of the past six months. Be honest about the decisions you made -- and try to determine the common theme of your smart and stupid choices.

I'll start off by looking at the ideas offered in this column and telling you what I've learned from my home runs and foul balls. Then, email me at jdmmail@microsoft.com to tell me where you went right and wrong, and I'll write about your comments later in the month.

No. 1 ... So Far

I'd characterize my point of view on the market over the past six months as constructively bearish. That sounds like a weaselly oxymoron, but it just means that I've catalogued the 17,000 ways the economy was going to hell in a handbasket while, at the same time, I've kept my eyes open for stocks that might escape the devil's clutches.

So far, so good. It's hard to compute a single, bulletproof 2001 return for this column because I don't keep one running portfolio, but Validea.com, a Web site that keep tabs on analysts' and writers' published stock picks, rates SuperModels No. 1 over the past six months among columns that recommended more than 100 stocks, with a 19.9% return. Over the past 12 months, Validea rates SuperModels at No. 1 as well, with a return of 56.3%, vs. 36% for my colleague Jim Jubak, and 13.3% for the top folks at TheStreet.com.

I should be grateful, but I don't endorse Validea's methodology -- which I could explain to you if you're ready for a nap. Cutting to the chase, I'd rather take credit and blame only for stocks that I specifically recommended as part of screens or models. I use 20% as an automatic stop-loss for any idea that fails and use the S&P 500 index as my benchmark. So the way I figure it, my return for 2001 through June 29 was 6.4%, vs. a 6.3% decline in the benchmark. Out of 11 model portfolios, I beat the benchmark with eight and underperformed with three. I clock these half-year results on a page on my personal Web site.

SuperModels Performance
Model Date My Gain/Loss S&P 500 Me +/- SP500
Swans 12/29/00 25.1% -6.3% 31.41
HiMARQ 12/29/01 7.3 -6.3 13.61
Mr. P 1/8/01 9.4 -4.6 13.97
Winter Chips 1/24/01 -20 -9.4 -10.64
Contractors 2/6/01 15.5 -8.6 24.08
INXspots 2/13/01 11.4 8.7 3.3
Supermodels 2/22/01 8.3 -1.3 9.59
Wizards 3/20/01 16.3 8.2 8.05
GARP 4/17/01 4.9 3.8 1.14
Industrials 5/17/01 -6.9 -4.1 -2.76
Smallcaps 6/20/01 -0.8 2.1 -2.9

Chips? What Was I Thinking?

My worst idea: Recommending semiconductor stocks three-quarters of the way through their big January rally. We quickly remembered that in a bear market, all parabolic rallies are sold. I bailed on this group with the maximum 20% stop-loss, though if I'd hung in there my loss would be a mere 19%. Best stock was Novellus (NVLS), up 26.5%. Worst was PRI Automation (PRIA), down 41.8%.

OK, that's enough self-examination of mistakes -- hand-wringing is so boring. And besides, my other failures were too recent to yield any lessons.

My best ideas? Anything that had to do with value -- particularly beaten-up stocks in the least-favored industries. Topping that list is my very first portfolio of the year, in which I named 20 "swans" that I thought would evolve from 1999's ugly ducklings. The big idea was to figure out exactly what the best-performing stocks of 2000 looked like at the beginning of that year, and then try to find ones just like them at the start of 2001. After doing some fancy fretwork in Excel, I screened for growing companies with decent balance sheets and trailing growth rates that had been bombed in 2000 along with their sectors.

The swans were up 23% year to date through the end of June, led by 80%-plus moves in RV manufacturers Monaco Coach (MNC) and Winnebago (WGO); several 25%-plus moves in regional banks such as F&M National (FMN) and Promistar (PRFC); and 35%-plus moves in teen retailer Charlotte Russe (CHIC), food-maker American Italian Pasta (PLB) and breast-implant maker Mentor (MNTR).

This concept of figuring out what the market likes statistically, then screening for a similar portfolio, worked for me last year at this time, too. Long-time readers may recall the "Early Risers" portfolio, which is up 22% since July 12, 2000, vs. a 51% decline in the Nasdaq Composite and a 16% fall in the S&P 500. It's been led by a 140% climb in RightChoice Managed Care (RIT) and a 71% surge in BEI Technologies (BEIQ).

At the moment, my calculations suggest that the market still prefers cheap, small-cap stocks with solid profits and balance sheets. If that taste continues, then these 15 names might turn out to be my swans for the second half of 2001. Many of these actually had a strong first half, so I'm not expecting to get as much oomph as from the January portfolio.

Cheap Small-Caps
Company Name Market Cap (in millions) Industry Name Price/Sales Return on Equity
Global Tech Appliances (GAI) 63.5 Appliances 0.60 8.7
Hawthorne Financial (HTHR) 94.3 Savings and loans 0.59 13.3
Universal Stainless & Alloy (USAP) 52.4 Steel, iron 0.55 14.3
Astronics (ATRO) 73.2 Packaging and containers 0.97 17.8
Friedman's (FRDM) 147.9 Jewelry stores 0.36 9.4
Ashworth (ASHW) 79.7 Textile-apparel 0.58 9.6
Medical Action Industries (MDCI) 95.6 Medical appliances, equipment 1.19 16.1
World Fuel Services (INT) 124.3 Basic materials wholesale 0.08 10.2
Movado Group (MOV) 257.7 Recreational goods 0.80 13.7
Peak International (PEAK) 82.5 Packaging, containers 1.01 14.4
AAON (AAON) 156.0 General building materials 0.95 33.0
Key Production (KP) 218.7 Independent oil and gas 1.86 24.4
Hancock Fabrics (HKF) 179.8 Specialty retail 0.44 13.3
Arctic Cat (ACAT) 351.5 Recreational vehicles 0.67 15.8
Heico (HEI) 178.8 Aerospace/defense products and services 1.97 15.4

'Lookalikes' That Leapt

Another successful mission to find bombed-out stocks with strong potential -- at a time that turned out to be one of the bottoms of the market -- was explained in " How to Become a Market Wizard" on March 21. The portfolio, called "Lauer Lookalikes," aimed for stocks that were down 50% more than the market, had strong balance sheets, low debt, suffered from a climate of extreme pessimism and were super-cheap. My seven choices were up 18.9% through June 29, vs. a rise of 7.3% in the S&P 500. Leaders were Charles River Associates (CRAI), up 87%, and Remec (REMC), up 18%. Here is the latest crop of names to track:

Latest 'Lookalikes'
Company Name Market Cap (in millions) % Change 12 Mos. to 7/9/01
Predictive Systems (PRDS) 143.6 -89.1
INT Media (INTM) 101.3 -82.0
Methode Electronics (METHA) 307.5 -79.3
Tessco Tech (TESS) 63.3 -52.1
Dick Clark Prod (DCPI) 92.9 -14.5
MarkWest Hydrocarbon (MWP) 62.1 -14.4
NUI (NUI) 299.6 -13.5

Construction Stocks With Muscle

One of the few times where I looked strictly for strength in stocks was in my Feb. 17 piece on construction and engineering stocks. I dug these up after screening for unusual, cheap momentum stocks and discovering San Francisco-based URS (URS). Swept along by the notion that a lot more power plants and airports might be built in the next five years, my six choices gained 16.2% by the end of June, vs. a 9.5% decline in the broad market. Leaders were URS, up 43.6%, and Jacobs Engineering (JEC), up 28.7%. I still like them all.

For more on what worked and what didn't in Jon Markman's SuperModels portfolios, click to read the second half of this column.

At the time of publication, Jon Markman owned shares in the following equities mentioned in this column: Microsoft and EMC.

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