Hits and Misses of 2014, Part 1

I enjoy all the year in review pieces in the media this time of year, but being a pundit on Real Money Pro, I cannot avoid having my own review. We contributors must pass judgment with you our subscribers -- and there is no hiding from what we have put in writing all year. Inevitably there are hits and misses over the course of a year, but on net I think I passed muster based on the standard to which all portfolio managers are held: be right more than 50% of the time. Along the way in 2014, we covered a lot of ground: best ideas, income generation, economics, investing philosophy, and even a few for-fun items. Let's look at the year that was 2014. Today we will look at the Best Ideas and Dividend Rotation, and I'll finish up with the rest Friday. Best Ideas Like all of our contributors, I had some great winners and a few dogs in our first full year of tracking Best Ideas. This is why one buys a portfolio of stocks, not just one! I hit it out of the park with my short of Ascent Solar (ASTI), which I lovingly refer to as Descent Solar. This was probably one of my easiest ideas ever, because the indicators were so obvious, which I laid out in this column on Feb. 24. The idea is simple: When you see a company that has underperformed for years, is burning through cash and enters into a death spiral financing in which the funding entity can issue stock at will to get paid back, you know it is going to zero. Gilead (GILD) was another home run (although it is off the highs) that was produced by one of my key disciplines, which is to look for names with the strongest upward earnings estimate revisions combined with low to reasonable valuation. Gilead was an inaugural idea I opened on Jan. 3, and I leave it open now one year in since the idea is still playing out as expected. The key here is that the fundamentals support the estimate trend. Gilead has an incredibly strong franchise in hepatitis treatment with Sovaldi, which is extremely effective -- perhaps too much in investors' eyes as the market worries that they are curing too many people too quickly. The chart below shows the power of this approach. At the start of the year, analysts expected GILD to earn $3 per share in the coming four quarters. Now analysts expect GILD to earn $10. That is earnings power! And with the stock at $96, you are paying less than 10x for solid growth and a strong franchise. Until the earnings outlook rolls over, I will be leaving Gilead on my best ideas list. Another home run pick, SanDisk (SNDK) came onto the list due to similar circumstances, with strong earnings momentum and a reasonable valuation. I closed out that trade on July 18 when the earnings momentum slowed, which proved to be a good decision as the stock has been flat since then. Closing that trade proved one important discipline: When the facts change, change your mind. I had just issued a positive update on the name, but when it missed expectations in an earnings report three days later, I did not hesitate to turn on it and sell. I can't tell you how often I see analysts hang on to an idea beyond its time because they are on the record with a stance. Better to be wrong once than twice. My biggest dog was Nu Skin Enterprises (NUS), the multilevel marketer of skin care products that blew up on me very soon after being put on the inaugural list. I closed it out about a month later for a 39% shellacking. Although a bit suspicious of the business model, I decided to take the plunge because earnings were going up and the valuation was dirt cheap. After the purchase the company was immediately embroiled in a controversy about its MLM business model in China, which has dogged it since. Lesson learned here: Don't buy strictly on numbers alone, understand what is behind them and what the risks might be, and only buy when you have confidence in the numbers and the underlying fundamentals (like Gilead). Having said that, bailing was the right decision, as the stock is down another 45% since the sale, so that was a good decision following up a bad one. My other mistake was placing too much emphasis on extremely cheap valuations. A few dirt cheap Chinese companies turned out to be you get what you pay for cheap. For instance, I liked Lihua International (LIWA) trading at a couple times earnings, which turned out to not be earnings at all when it collapsed as a fraud. Fortunately, I bailed out at a small loss because I didn't like the chart (someone always knows in advance), so my technical trading instincts were right, but the original trade was not. Other cheap names have worked, then not worked, then worked again, most recently, Pingtan Marine (PME). Or they simply did not work, such as road construction equipment company Gencor (GENC). The Dividend Diva For the past decade, my focus in money management has been on income generation. This hasn't been a bad idea, since it took the S&P 500 over a decade to regain the early 2000 highs. As I do every year, I posted numerous dividend rotation trades under my Dividend Diva moniker. The strategy, most recently described here, is designed to generate 8% or more of dividend income annually, using lower risk stocks that typically yield between 3% and 4%. The mechanics of the strategy are straightforward: Buy before the ex-dividend date then sell at your cost after you earn the dividend. Of course, like any trading strategy, the key is in exercising good judgment about the trades with the highest probability of success. Over the course of the year I regularly highlighted my most attractive dividend capture trades, occasionally declaring Dividend D-Days when a massive flow of dividend trades was upcoming. Because of the number of trades I make, I cannot publish every single one, so I offer the best of the best and give regular updates via my Twitter feed. The best way to evaluate any strategy, though, is how did it perform with Real Money? Fortunately, we can answer that question because I run a private partnership that executes this strategy, using the trades I offer up here. The results: So far, so good. In each of the last five years, I have generated over 8% in dividend income. This is my only goal, but realistically you need to look at total return, because you need to keep the NAV of the fund stable or growing. Being a fully invested equity strategy, we have also enjoyed substantial capital appreciation. I started 2014 with 14 open trades, initiated 215 new trades, and closed 217, leaving me with 12 open trades, most of which will go ex-div in early January. My average dividend size was around 1%, which is within my target range of 0.75% to 1.25%. (Note that this is the dividend, not the annual yield.) My average holding period varied between two week and a month, depending on market conditions, which is generally below my goal of an average holding period of six weeks. (The six-week goal is derived from the income target. To generate 8%, I need to turn my capital once a quarter if I am using a 4% annual yield stock.) The table below shows the monthly statistics for the strategy. Note that when the markets are good, you should be capturing a lot of income -- make hay while the sun shines. During corrections, you will take some losses, and you should pull back on activity. I will continue to offer a steady stream of attractive dividend plays in 2015, focusing on the key sectors of consumer non-durables, technology, and industrials. On Friday, I will finish my year-end review. Meanwhile, enjoy your new year's celebrations. We bid you adieu 2014 -- it was a good year!

Hits and Misses of 2014, Part 1

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