As I have done throughout the week, I will leave the political discussion to others. I cannot think of a more fruitless activity than trying to structure an investment portfolio around the announced policies of a particular candidate that will likely never come to pass. It may be fun to talk about, but I don't see it a as being a potentially profitable exercise for investors or traders.
Looking at the components of our hedged portfolios, however, has proven to be pretty profitable. Both of our two remaining portfolios have delivered spectacular performance. Although this is so far an intellectual exercise, there seems to be a high degree of merit to using them as either a hedged portfolio or a source of ideas. These have outperformed the overall market by a wide margin so far.
On Tuesday we looked at some truly ugly ducklings in a high-risk portfolio of falling knives. Today I want to take a deeper look into the portfolio that better suits my temperament and usual approach. This portfolio consists of stocks in the index that, at the time I put them in the portfolio, were down for the prior year and were trading below book value. This portfolio has returned 29% on an un-hedged basis for the past six months, and it's more in line with my usual stock-selection techniques. There are some interesting names in the mix this time around.
Among the picks are several of my long-term favorites -- for instance, Corning (GLW), which I have been recommending for some time. It is pretty close to the perfect stock, as it trades below book value and pays a dividend, and the company is profitable. Corning is well-positioned in areas of the market that look to see strong growth as the economy begins to recover next year. Hess (HES) has been my favorite oil stock for several months now, and is still fairly cheap, even after it rose sharply from my purchase price. Leucadia (LUK) is on my buy list and in my portfolio. That company's mix of operating businesses and assets is not only a good distressed investing selection, but a serious inflation hedge as well.
The list is heavily tilted toward energy stocks. Along with Hess, Rowan (RDC) is a stock I recently suggested as a buy for long-term investors. The company has exposure to the fast-growing deepwater-drilling market, and it should become a solid growth stock as energy demand increases over the next several years. Natural gas giant Chesapeake Energy (CHK) is very much a turnaround situation, but many think the company is worth several times the current price quote.
Busted technology stocks have also made the list of potential bounce candidates. Hewlett Packard (HPQ) has been talked up and down by virtually everyone on Wall Street. You may see a tradable bounce here, depending on what's revealed in 13F filings in the next few weeks, which will indicate whether investors like Seth Klarman have added to their stake. However, I prefer to buy this stock closer to my liquidation estimate of about $10. Xerox (XRX) is another name that has made it on the list, since this time the stock screen is for stated and not tangible book value. I like a stock whose company name is also a verb (see Taser (TAZR)) -- but, until corporate and government spending picks up in information technology, Xerox is probably will probably continue to tread water.
Archer Daniels Midland (ADM), meanwhile, is an intriguing laggard. The stock is pretty cheap for a company that is one of the leading players in the global food commodities markets. It is one of the largest grain processors, transportation and storage companies sin the world. Although volumes may decrease as a result of the drought conditions in the U.S., the company will see price increases, as well as strong international operations to offset those losses. The company has been expanding its transportation and processing markets internationally, with about 80% of capital-expenditure spending focused outside the U.S. this year.
Several cyclical stocks are in the portfolio. The continued weakness in names like U.S. Steel (X) and Cliffs Natural Resources (CLF) tells me that the economy is still struggling to gain traction and move into a solid, real recovery. These names stand to lag until economic activity begins to accelerate, but they could see a tradable bounce on positive short-term economic numbers.
Over the past year, this portfolio has sported some interesting names and solid buy candidates. Keep in mind that I never advocate buying an up day or an up market. If I had one of Doug Kass' proverbial guns to my head, and had to buy the portfolio today, I would hedge it with short index ETFs until we saw a substantial decline in the market.
