Hits and Misses of 2013, Part II

 | Dec 30, 2013 | 2:30 PM EST
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Note: This is a three-part piece. Please see part one here.

I've already gone over my best calls for 2013, so let's take a moment to review what I've gotten wrong. The goal here is not self-flagellation, of course. Rather, I aim to learn from these mistakes and thus perform better in the coming year.

These Charts Don't Lie

Easily my worst recommendation was Net1 UEPS (UEPS), the South African payment processor that I profiled on Nov. 22 in "Potential Profits Out of Africa." I thought this stock was undervalued because the market was overly worried about judicial action against the company for potential corruption in winning a large welfare-payments contract. Not a week after the piece was published, the South African Supreme Court reversed several lower-court decisions on the matter. This does not mean the company is guilty, but it will have to reprove its innocence.

I still like the name longer-term, as Net1 is unlikely to lose the contract now that it's an integral element of this government program. But you when you look at that chart, you have to at least consider this one a timing mistake!

Net1 UEPS (UEPS) -- Daily
Source: Yahoo! Finance

Another semi-miss was UT Starcom (UTSI), which I highlighted on Jan. 11 in "Shooting for the Stars." I liked it as a stock trading below cash with new company management and the potential to turn the business, which should ultimately give shares a valuation above cash. Unfortunately we are still waiting, but this miss d the value in buying stocks at cash: If you're wrong, at least the potential to lose money is lower than it is in a high-flyer.

UT Starcom (UTSI) -- Daily
Source: Yahoo! Finance

I have also been very wrong on gold. To put it in context, I am not a Fred Hickey-like advocate of putting most of your assets into the barbarous relic, but I do think it is a good alternative to cash and a great inflation hedge. Nonetheless, any and all gold holdings would have lost you money this year. I had made my strongest case on May 10 in "Gold is Golden," in which I noted: "My bull case for gold cannot rely on the chart, because it does not look pretty. But the monetary rationale for gold is still firmly in place, and the broken chart does not reflect the real sentiment around the metal."

I still own the SPDR Gold Trust (GLD) at about 10% of my portfolio as a hedge, and I still think massive money-printing will be inflationary in the longer term. However, this trade was a dog in 2013.

Caution Can Be Costly

Another miss was my yearlong suspicion of the broader stock-market rally. My fundamental concern -- which I voiced many times in posts such as "Color Me Cautious" published Feb. 15 -- was that the rally was moving along without any underlying earnings support.

S&P 500 vs. 2013 Earnings Estimate
Source: FactSet
S&P 500 vs. 2014 Earnings Estimate
Source: FactSet

Indeed, throughout the year, earnings estimates were cut repeatedly for both 2013 and 2014 for S&P 500 stocks -- yet the market rallied without skipping a beat. In fact, the rally was almost completely driven by a rising price-to-earnings multiple, which usually does not happen in the face of rising interest rates! While I was never outright bearish, my caution may have created an opportunity cost of lost profit potential.

S&P 500 -- 2014 P/E Ratio
Source: FactSet

Going into 2014, the situation is not improving in the slightest, so I will remain cautious in the new year too, until I see earnings support for the rally.

The Twitter Surge

Another one I'd generally have to classify as a "miss" is my defense of the trading action in Twitter (TWTR) after the initial public offering. On Nov. 8 in "Did the Twitter Action Make Sense?", I tweeted that the closing price and market capitalization made perfect sense when Twitter was viewed in the context of the valuations of its closest social-media peers. I noted:

"Because investors are pricing TWTR at the same market cap/user as the comps, they are implicitly telling you that they believe Twitter will get to a similar gross profit per user and they are willing to pay for that in advance."

Where I fell down was in failing to believe Twitter had even more near-term upside potential. I flat out predicted, "Twitter will need to grow into its valuation. They will need to double their profitability before the stock can start moving again." That was simply wrong, as Twitter stock proceeded to advance another 50% in the following month. I have no opinion on Twitter now, other than this: It will still have to grow into its valuation, as nearly all high-multiple growth darlings always do.

Twitter (TWTR) -- Daily
Source: Yahoo! Finance

In the final component of my self-review for 2013, to be published Tuesday, I'll take a look at the predictions I ventured around this time last year.

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