With two days left in the year, it's that time again to reveal the 2015 Gad Value Portfolio.
As discussed in yesterday's column, at the beginning of each year I choose ten equity positions that will be equally-weighted in a portfolio to go up against the market. I buy and hold for the year, regardless of any news or volatility unless a corporate malfeasance is discovered.
Today, I will reveal the first five selections and finish up with the remaining five tomorrow.
Three positions making it into the Class of 2015 are carryovers from the Class of 2014. They are Chesapeake Energy (CHK), Bank of America (BAC), and General Motors Class B Warrants (GM-WTB) (GM.WS.B).
It's no coincidence that two of these names underperformed the market in 2014. Year to date, Chesapeake is down 22% while the GM Class B warrants (GM-WTB) are down about 25%. Both CHK and GM remained highly undervalued in my view.
As for Bank of America, despite a 16% advance this year, I still think the bank has not reached full valuation given the potential earnings power that is likely to start showing up in 2015. Trading at 86% of book value, BofA should at least be trading 100% of BV because it is adequately reserved for its loan losses. On top of that, I believe BofA deserves a valuation that is a premium to book value based on the earnings power of the bank much like peer Wells Fargo (WFC), which trades for 1.8x book. A valuation of 1.2x book for BofA is not unrealistic and that implies 50% upside from here.
South Korean steel company POSCO (PKX) will also be part of the portfolio next year. Shares trade at a 52-week low thanks to declining steel demand and a bloated cost structure. That is changing under the new CEO, who is shedding assets and paying down debt.
Finally, rounding out the first five selections is natural foods grocer Whole Foods (WFM). In my view, Whole Foods has now transitioned itself from a niche grocery to a mainstream player that is in i's infancy stage.
Whole Foods customers are no longer hippies and the 1% anymore. The customer base has become much more mainstream. The company is also running commercials on a national scale for the first time. The idea of paying a little more for higher-quality food is resonating across a wider demographic in addition to Whole Foods providing more and more everyday value prices.
Tomorrow I will present the remaining five securities for the 2015 portfolio, and together these 10 securities are likely to do very well over the year.