Stockcoach's Corner

I really don't like snakes. Such slithering serpents scare Stockcoach significantly. However, I do know a cheap stock when I see one. And Cobra Electronics is cheap. Dirt cheap. I picked up another 1000 shares at $7.16 today. And I suppose if you're a manufacturer of such things as radar detectors, "Cobra Electronics" makes a lot more sense than "Puppydog Electronics".

I managed to squeak out a $400 gain today. For May, my portfolio gained 4 percent. Not bad, but not as good as the 7.6 percent gain achieved by the NASDAQ. Still, I did outperform the S&P 500 by 1 percent, which makes this 10 months in a row that I've beaten that index.

It was a reasonably strong week, as my portfolio gained $9,448 (2.4 percent) to $411,154, good enough for an all time portfolio high. I even managed to outperform the S&P 500 (up 0.8 percent for the week), and the NASDAQ (up 1.4 percent for the week). Still, with only one trading day left in May, I am trailing the NASDAQ by 4.1 percent for the month, so unless something magical happens, it looks like my 9 month winning streak against the Naz is going end. Have a great Memorial Day everyone!

I managed to squeak out a $1500 gain today thanks to a good move in AWX. I've been holding this stock for about 2 years now, and it's finally showing some life, as it moves to a more reasonable valuation (I bought it when it was only 20 percent of book value), and even after today's gain, it's only worth 40 percent of book value.

Poirot has Hastings the police captain as his sidekick, and now I have Hastings the company in my portfolio. It's the quintessential value stock: low P/E, P/B, and P/S. The stock sold off this morning after what I thought was a pretty solid earnings report (at least solid relative to how the market was pricing Hasting's stock). The company also augmented its buyback program, which should help push up the stock price over the next few months. I'm in for 2000 shares. In other news, my portfolio gained $3000, mainly on account of a good move in PSRC.

Down $2000, in what is become more the rule than the exception. Though my portfolio has gone largely nowhere over the past few weeks while the market has posted big gains, I am not ready to give up on what has been an immensely successful stock picking strategy, one that has generated terrfic results for me over the past 5 years. Indeed, I added another value stock to my portfolio today: Factory Card and Outlet. It's classic Stockcoach: trading below book value; P/S ratio of 0.1; and gross profits three times market cap. The earnings have been lackluster, but the company has implemented a new strategy, and it seems to be yielding good early results.

Nevertheless, despite my predilection for investing in small cap value stocks, I am beginning to think that I can do better. Thus, in addition to the value approach, I will try something new.

Bring on the Momentum Moose!

What heresy you say. Not quite. You see, there is a good reason to combine a momentum strategy with a value based strategy. One, momentum is a valid strategy, which has been shown to work in study after study, with Jegadeesh and Titman's 1993 paper being the seminal one in the field. Two, momentum and value strategies tend to be negatively correlated (for example, during the NASDAQ bubble, momentum was the way to go, while value strategies went no where; after the bubble burst, value strategies worked well while investing in past winners would have cost you a bundle of money). So combining the two strategies can lower one's overall risk without reducing expected return. And that's always a good thing!

As impossible as it seems, my portfolio actually outperformed the market today, gaining nearly $6,000. This was the first solid day in about as long as I can remember. However, even with today's gain, my portfolio has underperformed the major indices by a wide margin so far in May. Heck, I even managed to lose $1,700 yesterday on a day when everyone else and his dog made money. Is today the beginning of a turnaround for the Coach? I most certainly hope so!

I actually watched almost all of Reverend Jim Cramer's show yesterday. I was surprised by how critical he was of momentum investors. This is the same guy who was recommending Martha Stewart at $30!!! Still, I gotta admit I like and admire the guy.

My portfolio was up $100. Yippie. I switched on the TV at 9pm today and who do I see on CNBC? None other than Jim Cramer. First Screechy and Preachy had their own show. Then Preachy got his at 5pm and Screechy got his at 6pm. Now it looks like every day will be a double dose of Cramer, on at 6pm AND 9pm. Go figure. I know I've knocked Cramer before, but having said that, I think his first book Confessions of a Street Addict was exceptionally interesting, and undoubtedly he knows more about the market than almost anyone else. Still, I can't watch more 5 minutes of Mad Money without getting a headache. Much better to read what he is thinking, than listen to it.

Down $9 today (8 dollars and 86 cents to be exact). Meanwhile, the market continues its upward surge. This has not been a good time to be in small caps. As this chart shows, for the past few years, small caps have been the place to be. And that is why my portfolio is almost 100 percent smallcap. However, this has changed over the past couple of weeks, with the small cap Russell 2000 underperforming the major indices. This trend has intensified over the past 5 trading days. Is this the start of a prolonged trend? I don't know. One thing I do know is that it's much harder to find bargains among small caps then it once was. And indeed, the data validate this: the average P/E of small caps is now larger than large caps, a reversal of what was the case 2 years ago. Still, I think it's virtually impossible to outperform the market if you invest mainly in large caps. The market is just too efficient for that. So until I have been proven drastically wrong, I'm going to stick with the small caps.

The stock market continues to show me no love. I lost $5,646 this week (1.4 percent), bringing my portfolio value down to $394,316. Although the percentage loss was on par with the S&P 500, I significantly underperformed the resurgent NASDAQ, which gained 0.5 percent on the week. Since the beginning of May, I have underperformed the NASDAQ by over 3 percent. The 9 month winning streak of outperformance against the S$P and the NASDAQ that I enjoyed through to April is now at serious risk, especially against the latter.

However, I remain optimistic. Last summer was especially miserable for my portfolio: everything trade I made turned out badly. I was able to turn it around then, and I am hopeful I will be able to light a fire under my portfolio this time around too. I don't have any specific plans for doing this. But some of my stocks are extremely undervalued now (GTSI, COBR, and KTCC especially come to mind). I think it's only a matter of time until they move higher, taking my portfolio with them.

Not content to lose $1000 per day as I did on Monday and Tuesday, today I lost $2000. While the rest of the market recovers, Stockcoach's portfolio continues to drift down. This vexes me greatly. STMX reports earnings tomorrow. I hold 16,000 shares, which makes this a fairly large holding in dollar terms (though not as large as when I bought my shares... you can figure out why). My gut is telling me that the news will be good. Of course, that could just be the burrito I ate for lunch.

Just like the W., I no longer have any interest in any timber/paper companies. I got rid of Badger Paper Mills (BPMI) today after the company reported a stinky quarter and did not indicate that things will improve. Let this be a warning to the rest of the stocks in my portfolio: shape up or ship out! If you want to be members of Team Stockcoach, I expect you to improve your operating performance. Otherwise, you'll suffer the same fate as UTSI, CTIB, ZCOM, and now BPMI. Anyway, down another $1000 today.

Down $1000 today. I decided to kick UTSI out of my portfolio. Upon further reflection, the earnings report was just so bad that I don't think this stock has much upside. Of course, considering the large short interest, a short squeeze is possible. However, given the lack of a buy catalyst, that is not likely to occur.

Despite getting a coconut cream pie in the face today care of UTSI, my portfolio still managed to gain $4,432 for the week, an increase of 1.1 percent. Nevertheless, this was less than the gain in the NASDAQ (2.4 percent), and the S&P 500 (1.3 percent).

It seems like the tone of the market has changed. A lot of people believe that the market has hit bottom, and will begin to rally. Maybe. But as I've said before, I think a strong case can be made that the market is richly valued, and if you believe as I do that in the long run valuations drive the market, it's hard to be overly bullish.

Yes, I know that earnings growth has been very strong over the past year, and that the forward P/E on the S&P 500 is only about 15. But I continue to maintain that the outlook for earnings is poor. For the past 5 years, corporate earnings growth has upstripped wage growth due to strong productivity gains and a less than stellar labor market. As a result, corporate income as a share of GDP has risen well above historical norms. This isn't sustainable. As the labor market recovers, wages will rise and profits will get squeezed. The pressure on profits from increased commodity prices will only accelerate this trend. Thus, while we may see a recovery in stock prices over the next few months, I still continue to believe that we are in are in a secular bear market, and that in 3 years, the major indices probably will not be much higher than where they are today.

You see, I was contemplating selling my 1000 shares of UTSI today after the stock rallied nicely in advance of the earnings release. Of course, I got greedy and decided to hold my shares in hope that the numbers would be good. Had I sold, the stock would have rallied 20 percent. Unfortunately for UTSI shareholders, I held on, and sure enough, the numbers sucked and the stock fell 30 percent in afterhours, leaving me and other UTSI shareholders with a big fat loss. The upshot is that UTSI's plunge changed my $2000 gain for the day into a $1000 loss. Oh well.

In other news, I sold my shares of JLMC. Though JLMC has a nice balance sheet, the wedding dress maker prospects aren't too great, and ever since it voluntarily delisted, liquidity has almost completely dried up. It's not worth holding anymore. I also sold all my shares of MTSL. I bought them during the dotcom bust when they were trading at less than a dollar. Since then, the stock has risen above $3 but the company's operating performance is still lousy (with today's grim earnings report being the icing on the cake). Again, not worth holding anymore.

I didn't get an invitation to today's big stock market party. My portfolio managed only a $500 gain. For the week so far, I'm up $2500. Not bad, but if my money were in an index fund, I would have gained even more. It looks like the adjustments that I made to my portfolio last year have resulted in a portfolio that has a very low (and perhaps even negative) beta. I would say that for the past 3 months, my portfolio has been virtually uncorrelated with the market. On days when the market is up, that's a bad thing. On days when the market is down, that's a good thing. Luckily (for me), the market has been down more often than up this year, which helps explain at least in part my outperformance.

I found this little blurb at the bottom of a recent Motley Fool article rather amusing:

Since he launched his Motley Fool Hidden Gems newsletter service in July 2003, Tom's picks have returned 28% -- a mind-blowing 23 percentage points above the S&P 500. If you like those odds, Tom is offering a no-obligation, 30-day free trial to Hidden Gems, full privileges included -- simply click right here to learn more.

Now, I ain't no math genius, but by my calculation, the S&P 500 equal weight portfolio has returned roughly 40 percent since July 2003. As I've argued before, an equal weight portfolio is the intellectually correct benchmark against which one ought to measure returns. So by my score, Mr. Gardner has underperformed the market and owes his subscribers an explanation. Now, I don't want to push this point too far because I realize that almost everyone compares their returns to the S&P 500 value weight index (including me, by the way). Still, if people knew better, do you really think Mr. Gardner would be bragging about his results?

As for the essence of the article, what can I say? The facts are sort of right but the interpretation isn't. Yes, it's true that value stocks have historically outperformed growth stocks. This does not mean, however, that the efficient market hypothesis is wrong. Look at it this way: consider two companies that are identical in every way except that company A is "riskier" than company B. In an efficient market, the price of company A would be lower, and the expected return to holding company A's stock would be higher (to compensate investors for the extra risk of holding company A's stock). This implies that company A's price to earnings ratio and price to book ratio would be lower than company B's. Anyone looking at the data would then observe that "value" with low P/E and P/B ratios tend to outperform growth companies.

Thus, the fact that value outperforms growth is not an indictment of the efficient market hypothesis. The real mystery, as Fama and French note, is that value stocks do not have higher market betas than growth stocks. Hence, they are not "riskier" in in the way standard finance theory dictates. However, as Fama and French also note (and very few people seem to appreciate this point), this does not imply that that the efficient market hypothesis is wrong either. The reason is that value stocks and growth stocks tend to move together like flocks of birds. Sometimes value does better (like in the past 4 years), and sometimes growth does better (as in the late 1990's). If it were the case that a simple strategy of going short growth stocks and using the proceeds to go long value stocks generated risk-free excess profits, then the efficient market hypothesis would be wrong. But it's not.

Where does that leave me? Despite what you may think by looking at my portfolio, I'm neither a value investor nor a growth investor. I'm an opportunist (in the good sense of the word!). If this were 1999, you'd see lots of internet stocks in my portfolio because that was clearly where the profits were. In today's environment, I believe that value stocks are the better choice, and I'll continue to invest in them until I am proven otherwise.