The Idea

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Aug. 3rd 2008 in 8 Stock Portfolio

“Oh what happened now? Did the rubble burn down?” - Ned Flanders

The stock market is not in a happy place. Even though the major indexes are down a mere 20% or so, many individual stocks have been absolutely taken to the woodshed. Despite the recent rally in the financials, many stocks are still down stomach turning amounts. Some stocks are down 50%, 70%, 90% or more from their 52 week highs.

The reason? Take your pick.

Subprime losses, high oil and gas prices, commodity prices, food prices, inflation, deflation, stagflation, unemployment, crumbling housing prices, foreclosures, the weakening US economy, the sinking dollar,exhausted/pessimistic/cash strapped consumers…

Is the rout over? Or is there more pain ahead?

This past week, I remembered another time not too long ago that felt similar. The year was 2003. Priceline was trading for less than the cash on its balance sheet, and the company wasn’t even burning cash. Apple was trading for a few dollars above cash and no one saw anything special about this company with 4% of the PC market and a few fringe products. A funny sounding company called Research in Motion slipped below $2 per share. There are more, but you probably get the picture.

Stocks that had been absolutely beaten to the ground and left for dead, shockingly rose from the dead. Companies who had to issue embarrassing reverse split to stay listed, later issued splits to reverse the previous reverse split. Many individual stocks posted obnoxious 1,000% + gains in the course of a few years. The Dow even went on to notch a new all time high.

So here we are.

The Idea: We probably aren’t out of the woods yet. And this isn’t 2003. But I am choosing to be optimistic.

This is either an opportunity, the brink of an opportunity, or a good time to close my eyes and take a shot.

I selected a basket of 8 stocks down 50% or more from their 52 week highs. I’m going to buy them and track the performance of the portfolio. My intention is to hold them for a period of 3 to 5 years through thick and thin. Likely some will work out and some will fall, but on the balance I’m hoping for some shocking out performance.

The worst of the lot is down 98% from its 52 week high. The best of the lot is down 54%. In subsequent posts, I’ll explore some of the thought process behind the picks, but for now here’s the 8 Stock Portfolio:

Can these stocks go lower?

Sure. The rubble can burn down.

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7 Comments

  1. Chuck's Gravatar
    Chuck, August 5, 2008:

    As I see it, the guv’ment is talking tough on inflation but doing everything required to cause inflation (keeping rates down, pumping money into the economy). High inflation will mean high prices. Upscale companies will find their business falling off. I put Chico’s, Ruby Tuesday and Whole Foods into that category. I don’t know about some of the other companies. As more and more foreclosures rock the spendable income of the country and cause more bank failures, jobs will continue to be lost and spending will slow even more. I’d be extremely wary of betting on these losers.

  2. admin's Gravatar
    admin, August 6, 2008:

    I think the market has been discounting this kind of bleak future for months. Specialty retail and restaurants have been sold across the board.

    At some point, the worst scenarios have already been priced in. While I can’t say for sure whether this has happened, I am willing to bet selectively.

    WFMI, RT, and CHS are better positioned than most of their competitors to ride out any dark periods. As of their most recent quarterly results, each was still profitable and cash flow positive.

    Visit back at the site every few months, I’ll be tracking the performance of the portfolio and each individual stock.

    Time will bear one of us out.

  3. Michael V's Gravatar
    Michael V, August 6, 2008:

    I dont know if playing with your money is a good idea… I hope you’re not putting too much into these. Esp VMWARE with it’s management problems. Try YGE (its @ 15.7 currently which is only 5$ off its 52 week low of 10 and it’s 52week high is 45.) plus analysts just gave it a new rating of 45/share while it crushed it’s earnings.

    just my 2 cents :)

    Michael, http://www.StocksHaven.com

  4. admin's Gravatar
    admin, August 6, 2008:

    Don’t know where the idea of “playing with my money” came across.

    Check out the individual reasoning for each of the picks. None of these were entered into lightly.

    And of course check back in the coming weeks to see how the portfolio performs.

    YGE? I don’t know what a photovoltaic product or multicrystalline polysilicon ingot is. Probably not the right stock for me.

  5. Bob's Gravatar
    Bob, August 10, 2008:

    I think this portfolio will probably outperform the market. This bear market has beaten down some decent companies to extremely enticing valuations. I personally own Brunswick and have traded it off and on over the years. I can’t believe it’s now priced where it was when I first purchased it over 10 years ago. One company that has really been hammered is Monaco Coach (MNC). The company has a pretty strong balance sheet and is suffering for obvious reasons, but has the potential to be a 10 bagger when things turn around.

  6. admin's Gravatar
    admin, August 10, 2008:

    Thanks for your comments. I had also considered MNC for the portfolio. (See 20 Stocks Left Behind)

    I left out MNC since they seem to be up against some much stronger competitors like THO and WGO. In the event of a prolonged slump, some of the smaller players might not make it.

  7. BILL's Gravatar
    BILL, December 20, 2009:

    A NICELY DIVERSIFIED PORTFOLIO OF COMPANIES THAT HAD PROBLEMS AND IN MOST CASES, A LOT OF DEBT. THE UPSIDE TO THE CURSE OF DEBT IS THAT THE LEVERAGE RESULTS IN HIGH RETURNS WHEN SALES INCREASE, ESPECIALLY IF THE DEBT (BORROWED MONEY) WAS INTELLIGENTLY DEPLOYED FOR FUTURE GROWTH.

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