I’ve created a handful of fanciful stock portfolios in this column in the last four years. They don’t have real money in them, but I do use them to generate ideas for client portfolios.
Each was designed to make a point about how the securities markets function. It’s time to look in on how they’re doing so far this year.
At the beginning of each year since 1998, I’ve created a pair of four-stock portfolios, one with the stocks that securities analysts like least and the other the ones they love most.
I call them the Despised Portfolio and the Adored Portfolio.
While I don’t generally recommend buying either group, I prefer the “despised” stocks to the “adored” ones. So far, the Despised Portfolio has managed one win (2000), one loss (1999) and one tie (1998).
In 2001, the Despised Portfolio is way ahead. Led by a 137 percent gain in Great Atlantic & Pacific Tea Co., it has raced to a 32 percent gain through the end of July.
Meanwhile, the Adored Portfolio has plummeted 69 percent. All four of the preseason favorites have dropped, with Winstar Communications Inc. down 99 percent and Network Appliance Inc. down 81 percent.
You might take away two lessons from this. First, don’t be unduly awed by analysts’ opinions. Second, analyst opinion is most likely to be wrong at the extremes that is when sentiment is strong and nearly unanimous.
This is my favorite. It contains the stocks with the lowest price-earnings ratios at the beginning of each year. The stocks also must have a market value of at least $500 million and debt less than stockholders’ equity.
In 1999, the Robot Portfolio was up 40 percent, double the return on the Standard & Poor’s 500 Index. In 2000, it returned 68 percent, while the S & P; 500 was down about 9 percent.
This year the Robot Portfolio is up 18 percent through the end of July, compared to a loss of 7.8 percent for the S & P.; Eight of its 10 components are up, with Kulicke & Soffa Industries Inc. gaining 50 percent and Delphi Automotive Systems Corp. up 45 percent.
I make it a point each year to include at least five of the 10 robot stocks in actual client portfolios. This year I am using Vishay Intertechnology Inc., Kemet Co., Kulicke & Soffa and Massey Energy Co. I am also unfortunately using USG Corp., which has plunged.
The Bunny Portfolio, named after the Energizer Bunny, contains stocks that have shown rapid earnings growth in the past five years (25 percent or better), but are selling for 12 times earnings or less.
These are stocks that most investors think are about to hit a wall. However, people can’t predict the future very well and I think it’s just as likely that the stocks like that bunny will just keep going and going.
The Bunny Portfolio was created in December 1999. Over the next 12 months it was up 20 percent, while the S & P; declined 2.3 percent.
The second annual Bunny Portfolio, created in December 2000, is up 6.3 percent this year through the end of July. As noted, the S & P; 500 is down 7.8, so the Bunny, while slower afoot than last year, is still beating the S & P; by nearly 14 percentage points.
Perfect 10 portfolio
The Perfect 10 Portfolio consists of 10 stocks, each of which has a P/E ratio of 10.
Created in July 2000, the Perfect 10 portfolio provided a return of 41 percent in 12 months.
The second annual Perfect 10 Portfolio was launched a little over a week ago. It includes four stocks that I own for clients Northrop Grumman Corp., Inco Ltd., Tommy Hilfiger Corp. and WorldCom Inc.-WorldCom Group.
Created in November 1999 and not revised since, the Buckeye Portfolio consists of value stocks with headquarters in Ohio. It makes the point that unglamorous companies often do better than glamorous ones. The Buckeye Portfolio is filled with the likes of Dana Corp. (up 69 percent this year), Goodyear Tire & Rubber Co. (up 25 percent) and Steris Corp. (up 36 percent).
On average, the 10 stocks in the Buckeye Portfolio show a 17 percent gain this year.
Finally, there’s the Sane Portfolio, first aired in August 1999. It buys stocks that are cheap by several measures, have decent profitability, not too much debt and a history of positive earnings growth. It is a 12-stock portfolio, intended for fairly conservative investors.
So far this year, the Sane Portfolio has returned 10.8 percent, again nicely beating the S & P; 500.
John Dorfman is a columnist with Bloomberg News.