Unless you are retired or a small child, one dreaded ritual you cannot escape this time of year is the performance review. For portfolio managers it can be harsh but at least quick: You either outperformed or you didn't -- case closed.
Similarly, for us contributors here at Real Money, we must pass judgment with you our subscribers -- and there is no hiding from what we have put in print all year. No one is perfect, so inevitably there will be both hits and misses in any given year. But, on net, I think the year was a good one. In this three-part performance review, I go over what I consider my best and worst calls, along with lessons learned and implications for the future. This was the year that was: 2013.
In this piece, I'll focus on my best ideas of the year.
Long Shots Go Long
First, I offered several specific stock ideas in our "Long Shot" columns, most of which made money in 2013.
For instance, I highlighted a catalog company for auto and manufacturing parts, ARI Network Services (ARIS), on April 1 in "Getting Saas-y." This one was no April Fool's joke, as shares have asppreciated 24.6% since that recommendation date. On July 10, in "Wired for Value," I shined the spotlight on Lihua International (LIWA), a Chinese maker of wires and cables that uses recycled copper. The key was the value: Shares were trading below cash. At this point, despite a nice run, the company's cash has piled up and the valuation anomaly has not yet closed, so I still really like this one.
Staying with the China value theme, on Nov. 1 I reeled in Pingtan Marine (PME), an operator of a large fishing fleet, in "Fishing for Profits." The company is unknown and very undervalued. Management recently guided to $85 million in net income for 2014, which makes the stock dirt-cheap against its market capitalization of $267 million. This is still one of my top picks, as you can see in our "Best Ideas" section to the right.
Finally, on Nov. 27 I moved back to the theme of trading below cash, identifying Gencor Industries (GENC). In "Good Road to Follow," I noted how this decades-old maker of road-construction equipment was trading below cash, yet is a real business with a long track record of revenue and profit. Gencor should be coming out of the latest downcycle, offering the potential for appreciation driven by both profit growth and revaluation by analysts.
Beyond the "long shot category," I also commented on Berkshire-Hathaway (BRK.A/BRK.B) after attending my 22nd annual meeting. This was not a stock pick (or pan), per se, but I was troubled by the attitude of Berkshire management and what that could mean for the outlook for the company. On May 6, in "Berkshire Debrief: Resting on Laurels," I expressed my frustration:
"Chairman Warren Buffett and Vice-Chairman Charlie Munger have a track record that confirms the wisdom of their approach to business, but for many of the questions they seemed to be resting on their laurels. They justified a position by essentially saying 'we are the richest men in the world, our record speaks for itself, so we must be doing something right.' I get nervous when management dismisses a competitive threat or other issue by citing the fact that a certain approach had worked in the past. The past is nice, but how many businesses were blind-sided by radical fundamental changes that management dismissed? Newspapers, anyone? World Book?"
The meeting didn't cause me to be an outright short, as it did with Doug Kass (who did an amazing job as the lone bear on the panel of questioners at the meeting). However, I think Berkshire's best days could be behind it. Certainly the company has put in an underwhelming 2013.
Sparks Fly in Alternative Energy
Moving off individual names, I also identified some broader themes that led to profitable trades over the course of the year.
Notable was the resurgence in alternative energy, which had been given up for dead in 2012. I caught a turn in biofuels after I attended the Advanced Biofuels Leadership Conference in April, advising readers to "Stay Patient on Biofuels." Many of the names had a spectacular year, as issues with the ethanol blend wall significantly improved profitability.
The solar industry also reached its long-awaited trough after two very difficult years. The rationalization of supply in China enabled a stabilization in pricing and margins and, in the meantime, low panel prices were causing project starts to soar. I did not catch the bottom -- but on Sept. 20, in "Solar Industry Back in the Sun," I noted the following:
"The solar panel industry has been in a long, cold, dark 'winter' of pain, but the cycle seems to have passed the trough. The outlook for 2014 could be promising. . . . I think we are early in the turn of the cycle, and the group can outperform for the next one-to-three years."
A Thorn in Apple's Side
Then there was a theme I first identified in 2012, when I went negative on Apple (AAPL) -- the coming commoditization of smartphones. I further developed this theme starting in March with "Smartphones for Everyone." Asian producers of phone chipsets are creating incredibly cheap smart handsets which, when combined with Android, can offer iPhone-like performance at a fraction of the cost.
Over the next few years, the trend in smartphones is going to mimic the trend in personal computers in the 1980s, when the parts were commoditized and incredibly cheap in volume. This is bad news for Apple, which uses extremely high prices to sustain its margins, and I still think Apple will be under secular margin pressure in the years ahead.
Having said that, on June 12 I did point out -- in "Another Bite of the Apple" -- that Apple stock was very washed out, and that it could set up for a good trade when the estimate revisions turned. That did in fact happen, and Apple was a great trade for the second half of the year as the stock tracked the estimates higher.
Slip-and-Slide for Real Estate
Another theme, and one that emerged from my "on-the-ground" research during my annual summer drive from L.A. to Iowa, was the "Coming Head-Fake in Real Estate" that I called out on June 28. At that time I noted:
"According to my agent friends, the back-up in rates is causing a frenzy of activity unlike anything they have seen in recent memory. Buyers are desperately bidding to get purchases done before rates go even higher. Sellers who are no longer under water are desperately listing their homes, attempting to get out before the market potentially tanks on them again. . . . The sucker punch will come later in the summer, when this frenzy of activity subsides and the impact of higher rates will really be felt. . . . Do not get head-faked by strong housing statistics in July and August."
Sure enough, the headlines from the National Association of Realtors Existing Home Sales barometer tells the tale. With mortgage rates continuing to rise, housing will face a significant headwind in 2014.
July: "Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 6.5%"
August: "Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.7%"
September: "Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 1.9%"
October: "Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 3.2%"
November: "Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, dropped 4.3%"
It's Raining Dividends
Finally, if you read me you know that I am the "Dividend Diva," executing a dividend-trading strategy that boosts income generation while reducing portfolio risk. This strategy resonates with folks who consider themselves investors -- those who are starved for income and (smartly) are unwilling to take the stock-specific risk necessary to generate higher yields.
There were far too many dividend trades to review here, but I can best summarize the results by offering the actual performance of my dividend income fund, which executes this strategy. As of this writing, the total return (income plus capital gains) for the fund this year is at plus 36.43%. My target for income generation is 8% a year, yet at this point the fund has generated income of more than 10% through 224 dividend trades.
The fund has been running since October 2009, and has achieved income generation of more than 10% in each full year -- although the total return has varied, of course. The total return since that Oct. 1, 2009 inception date is at a gain of 76.05%.
On Sept. 7, I took advantage of one of our periodic "open houses" to elaborate on the strategy for new readers in "Diary of a Dividend Diva: 2+2=8." You too can learn more about dividend rotation in that post. Email me for more information about the fund.
That's it for my best calls this year. Before my ego gets too big, I'll restore humility with some reminders of my biggest misses of 2013. Stay tuned.