The Real Story: First-Half Report Card

I have long believed that going against conventional wisdom (in the right places) is key to outperforming the market. The performance of the Real Story's "portfolio" in the first half of 2006 supports that approach. The 19 stocks recommended in the column -- 10 longs and nine shorts -- gained an average of 5.8% through July 5 vs. a 0.2% loss in the S&P 500.

The 10 long picks were up an average of 2.9%, while shorts were in the black by 8.1%. Results do not include dividends.

The largest winner was Elan ( ELN), which recorded a 32.4% gain since I recommended walking before they make you run on June 21.

Not surprisingly, the biggest loser is a 34.4% shellacking in Beazer Homes ( BZH), which I recommended on April 28. The housing market has fallen apart, but I continue to believe lower earnings are already priced into housing stocks and that most of these names shouldn't get much cheaper.

However, St. Joe ( JOE) is one housing/real estate name that I have been bearish on since March. An inventory glut exacerbated by desperate speculators looking to get out of their holdings amid falling prices has created a situation where St. Joe is being undercut by its own existing home and landowners. My price target remains $31.

Long and Strong

I still like the long names in the portfolio. They include Webster Financial ( WBS), Movado ( MOV) and Dynamic Materials ( BOOM).

Since first writing about Encore Medical ( ENMC) in early 2006, I stated that the orthopedics company could be a takeover candidate. On June 30, Encore announced it was being acquired by the private equity firm Blackstone Group for $870 million, or $6.55 per share, 14.9% above the closing price on the day my first story on Encore appeared.

Nine are Fine
Other than Beazer Homes, the long positions mostly fared well in the first half
Stock Date Entry *Current/(Exit) Gain/Loss
WBS 1/31 46.85 47.30 1.0%
ENMC 2/8 5.70 6.30 10.5%
SUNW 2/15 4.32 4.03 -6.7%
ELN 3/6 12.7 16.81 (6/21) 32.4%
SCG 3/10 40.07 38.54 -3.8%
BOOM 3/14 32.94 33.37 1.3%
MOV 3/29 21.81 22.18 1.7%
BZH 4/5 68.25 44.77 -34.4%
NTGR 4/21 18.55 24.07 (6/5) 29.8%
NOVL 6/23 6.66 6.49 -2.6%
Avg. (* As of close, July 5) 2.9%
Source: Prophet.net, TheStreet.com

Short and Sweet

There aren't too many shorts that are still open (see table below). Lamar Advertising ( LAMR) has been disappointing, as the stock has gained 16% since my original story in January. I must admit to being confounded by this one. The fundamentals have pretty much performed the way I expected, yet the stock has been extremely strong. I remain confident in my analysis of the business, but the stock has not cooperated.

BJ's Wholesale Club ( BJ), which I first wrote critically about on Jan. 10, had been showing signs of improvement. But the company returned to its losing ways Thursday, reporting disappointing same-store sales figures. The 0.1% decline was 2.5% below consensus estimates. As a result, BJ's cut its second-quarter earnings-per-share guidance by 3 cents to a range of 37 cents to 40 cents. The stock was recently down 2.1%.

My latest pick, a bearish position in TD Ameritrade ( AMTD), should work out nicely. Wall Street and the company remain convinced that the latest technical problems will not affect revenue. However, I have heard from many investors and active traders who have left Ameritrade as a result of the unsatisfactory service, or were handed bucketfuls of free commissions. One very active trader I spoke with was given a month's worth of free trades. That has to show up in the numbers.

Lastly, investors who are short VistaPrint ( VPRT) on the basis of my recommendation should have a gain of around 18.9%. This is a volatile name. Keep a tight stop to protect gains or consider locking in some profits by partially covering the position.

Against the Grain
Lamar confounds but shorting stocks beloved by analysts has been profitable
Stock Date Entry *Current/(Exit) Gain/Loss
LAMR 1/5 46.43 53.86 -16.0%
BJ 1/10 29.7 28.21 5.0%
APPX 1/19 37.29 28.25 (3/9) 24.2%
PFCB 1/25 50.29 39.86 (6/15) 20.7%
ADBE 2/27 39.19 36.33 (3/23) 7.3%
JOE 3/23 60.95 45.98 24.6%
K 4/12 43.21 47.26 (6/5) 9.4%
VPRT 5/24 30.91 24.07 18.9%
AMTD 6/27 14.74 15.16 -2.8%
Avg. (* As of close, July 5) 8.1%
Source: Prophet.net, TheStreet.com

Movin' On Up

This column will be my last regular "Real Story" piece. I am happy to tell you that I will be focusing my attention on the biotech sector from now on. I will continue to look at ideas through a contrarian's lens and may occasionally revisit some of the ideas that I've written about over the past six months as important news breaks. But going forward, the vast majority of my work will be in biotech.

I have long believed that the biotech sector will experience many electrifying breakthroughs over the coming years. It is my goal to help you find some of the companies that will profit from these discoveries and to avoid the pretenders. It is a volatile sector, but one that is packed with potential.

Hold on tight. It's going to be an exciting ride.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86,87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback; click here to send him an email.

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