My Top Five Booms and Busts for 2012

 | Dec 28, 2012 | 10:00 AM EST  | Comments
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One of the dreaded rituals at this time of year is the performance review, which most employed people must endure. (Even when your performance is excellent, it can still be an awkward experience!) We Real Money contributors must also pass muster with our subscribers, and because we are in print, there is no hiding from our recommendations. So to close out the year, let me review my top five booms and top five busts. Taking a look back should help us see what works, as well as learn some lessons from the ideas that didn't.

Top Five Booms

I opened the year on Jan. 4 with High Hopes for 2012, noting: "If earnings cooperate, the markets could be setting up for a better year than what we saw in 2011." Frankly, there is no way to describe equity returns this year other than excellent. The S&P 500 is up 13%, year-to-date.

On Jan. 25 in Apple, Incredibly, Could Still Mushroom with Apple (AAPL) stock trading at $446.66, I made the case that Apple's market share was so low in its principal markets (phone, computer, and song player) that it had plenty of room to grow. On March 15, in Is Apple Facing a '500 Fail? (with the stock at $585.56), I noted again that while many companies stalled out at $500/share and $500 billion market cap, Apple's room to grow and low valuation would enable it to continue to surge. On Dec. 12 in Shed a Tear for Apple (with the stock trading at $539) I changed my "iTune" on the name. I noted that I see a price war looming in the wireless industry, and absent subsidies for the iPhone, Apple's margins will be under severe pressure. What changed was Softbank's purchase of 70% of Sprint, which gives Sprint the ability to upgrade its network while aggressively pricing service. Apple ultimately peaked on September 19 at $702, a 57% gain from the start of the year. Since then the stock is down 27% (still leaving it up 15% for the year, slightly ahead of the S&P 500). The stock is at $513 now, down 5% since I turned tail on it.

On the tech theme, I also made the case why Microsoft (MSFT) is no longer relevant. In both What Microsoft Must Do to Survive on Feb. 22 and in The Problem With the PC Business on Aug. 24, I argued that success in tech products is now being driven by integration of hardware and software, and the "Wintel" model of the stack of PC elements ensures an inferior product. Despite its prodigious cash flow, Microsoft is now a "run off" company and is no longer relevant in tech. Since that first call, Microsoft is down 14%, vs. a 5% gain in the S&P 500 over that period.

Some of my "Longshot" microcap names are doing quite well. On Sept. 24 in An Energy-Infused Turnaround, I recommended one of the best turnaround set-ups I have seen in quite some time. Energy Recovery (ERII) manufactures "energy recovery" devices used to improve the efficiency of high-pressure fluid and gas processing systems, and is dominating its existing market of desalination plants and moving into new markets in gas processing. The stock is up 16% since this post, yet I believe it can be a multi-year, multi-bagger trade.

Finally, while I try not to be a market timer, one of my better indicators proved prescient during the year. I track the trend in earnings estimate revisions, and compare it to stock price movement. At several points during the year, the S&P 500 was rallying hard while the analysts' operating earnings estimate was not being revised upward. This "Jaws"-like gap is usually unsustainable, and should result in either upward earnings revisions or a correction. On March 9, in Estimates Flash a Warning Light, I first flagged this indicator and the risks in the market. I continued to note large divergences throughout the year, most of which signaled corrections. The chart below summarizes these calls.

S&P 500 Stock Price vs. 2012 Earnings Estimates
Source: Factset Using FirstCall Estimates

Top Five Busts

Early on, I was incredibly bearish on Europe. On Jan.23, in Put on Your Ponchos, I exhorted "The next few months are going to be horrifically bad for Europe, and when this financial hurricane makes landfall I am not convinced the rest of the global economy and markets won't convulse in reaction." The US markets did convulse mid-year, but Europe has not yet blown up in spectacular fashion, thanks to massive ECB money printing. I do think Europe is doomed, since the debt levels are simply unsustainable and will never be paid back. However, this didn't happen in 2012. You can decide if I am "early" or "wrong"!

Some of the "Longshots" proved that our disclaimer about high risk of loss is not simply boilerplate. One egregious example is Solar Power (SOPW), which I recommended on June 8 in A Potential Ray of Light in Solar at $0.28. I noted that panel prices were collapsing, making solar projects more economic for the companies that sponsor them. SOPW seemed well-positioned, having grown revenue each of the last couple years. Revenue is still growing, but they are unable to make money and their majority ownership by bankrupt Chinese panel vendor LDK is dragging them down. The stock is now at $0.05, an 82% decline. Sunburn, indeed.

Similarly, on Oct. 5, I highlighted Abtech Holdings (ABHD) in Set to Sponge In the Profits. This company makes a highly engineered "sponge" material that is being rolled out into storm water runoff treatment applications. Waste Management WM is their sales and installation partner, giving credibility to the technology. Abtech was early in anticipating its sales pipeline turning into revenue, and had to guide down late this year. The stock is down 23% since I posted on it. Nevertheless, I view it as a long term story and am still enthusiastic about the growth they could experience in the year ahead.

On the dividend side, I highlighted a couple names that are paying very attractive yields and are worth holding rather than trading, but the stocks themselves are down since recommendation. This makes them accidental high yielders, but since the dividends seem sustainable, I am sticking with them for now. On Sept. 12 in Diary of a Dividend Diva: A Hidden Gem, I highlighted Canadian energy reseller Just Energy (JE), which was yielding 11% at the time. The stock is down 17% since then, although absent any real news.

In a similar vein, I highlighted Poseidon Concepts (POOSF) on Nov. 19 in Diary of a Dividend Diva: Poseidon Concepts. Poseidon makes systems for transporting and storing fracking water, and has been booming over the last few years. Low natural gas prices caused a slowdown in exploration this year, which hit Poseidon in the third quarter. The stock was down 60% on an earnings warning. I entered after the fact, since they left the high dividend unchanged, since forward cash flow could fund it. Even if the dividend was cut in half, you still collect 12%. Since this post was published, the stock has declined by another 42%. This week, the board decided to suspend the dividend until a review of the company's operations is completed. Clearly there are real issues at Poseidon, and my entry was probably more "wrong" than "early."

So what is my final grade? My investors are happy: My large-cap GARP partnership is up 22% this year, outperforming the S&P 500 by more than 650 basis points. In the 14 years that I have been running the partnership, it is up 6% annually net of all fees, outperforming the S&P 500 by 300 basis points annually. My dividend partnership generated a total return of 12% this year, 10% of which came from (and was paid out as) dividend income. This partnership has a total return of 38% since its inception in October 2009, and has paid out 10% in income distributions each of the last three years.

The expertise, insight, and methods that drive those returns are what I share with you three times a week. I hope you are capitalizing on my posts, as well as those of all the great money managers who make Real Money the single best site in the world for stock market advice. Obviously, every thesis or trade idea won't work out, but, on balance, you should be getting good ideas to help drive your returns. You do our performance reviews with each article click-through, and we appreciate your attention and confidence.

On Monday, we will look forward to 2013. Until then enjoy your weekend and the rest of this holiday season.

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