My Mad Money model portfolio is off to a blistering start. It has posted a 32.5% gain since inception on January 17, a period in which the Russell 2000 has fallen 1.5%. I can't lie ... it feels good. The natural reaction to such performance is new client acceptance -- and a flurry of new account openings has kept me busy the last two weeks. People are drawn in by my performance figures, but the question is: how do I replicate that performance?
Yes, you can insert any "it's a high-class problem/good problem to have/etc." cliché you want, but the fact is: it is a problem. My clients want performance, and that performance has been driven by some non-traditional (to say the least) returns in individual securities. To wit: GreenHunter Resources (GRH) up 153% since inception; Arabella Exploration (AXLWF) +116%, True Drinks Holdings (TRUU) +50%; BPZ Resources (BPZ) + 43%.
So, really I am left with two questions:
- Do I buy the same names that have performed so well? In other words, can I buy something today that has already doubled in the past six months?
- How do I find new names that will post asymmetric returns, as GRH and AXLWF have?
Question one also has a corollary: do I take profits in the high-flyers in existing portfolios? That's an easy one: No. I created Mad Money as a buy-and-hold strategy and, with a threshold of 50% calculated upside, I am not shocked that some of these names have performed so well. I am certainly not going to sell them now. It's a long-term strategy; short-term success shouldn't alter tactics.
But the core of question one remains, so here's my answer: I'm still buying AXLWF, as intrinsic value (based on the underlying share AXPLF) is $3.20 and the warrants are trading at $1.94 currently. So it's still a buy. Similarly with True Drinks, I derived a target price of $1.14 in my column about TRUU on March 28, and there has been nothing to alter my methodology. So TRUU easily passes the 50% upside test and I have been buying it this week.
The other two are not so simple. GreenHunter has had an amazing run, and I have not sold a single share of GRH, nor of the company's Series C preferred (GRH-C), which is my firm's largest holding. But do I commit new capital to GRH after a 200% run in three months? At this point, I am not adding GRH to new Mad Money portfolios, as I am trying to wrap my head around GRH's contemplated new MLP structure. I valued the "old GRH" at between $2 and $3/share. With no details available on general/limited partner split and asset inclusion, I just don't know how much the MLP should add to that valuation. So I'm on the sidelines for now, but still holding the GRH that I own. BPZ is a similar story. I believe fair value is somewhere near $4 a share, but with BPZ now trading at $2.89 a share, that fails the upside test. So I'm a holder, not a buyer at these levels.
What am I buying instead? In this irrationally exuberant market, one has to cast the net wide to find undervalued securities. In portfolios I have built this week, I have added shares of HII Technologies (HIIT) and Victory Energy (VYEY). HIIT is trading at $0.64 and VYEY at $0.31, but this isn't some penny stock swing-and-hope-I-get-lucky strategy. I discussed HIIT and its role in the fast-growing and vitally important frac water management sector in past columns. While space precludes me from telling the Victory story now (I'll touch on VYEY in a later column), I believe this emerging E&P name possesses some very attractive acreage in the red-hot Permian basin.
So, I'm managing growth in my Mad Money stock-picking assets, but I am also adding new clients in my Classic, income-only strategy. If it seems difficult to find undervalued stocks here, it is even more difficult to find undervalued corporate fixed income securities after the surge in the high-yield debt market. But I am finding some bargains among preferred stocks, and I'll share those in tomorrow's column.