We have 3 buys and 3 sells for Monday, including the elimination of one name, two trims, two adds and a new purchase. The net effect on the portfolio will be to raise the overall expected return modestly as we shift out of Healthcare slightly and Industrials to a greater degree towards Technology modestly and Consumer Discretionary to a greater degree.
Starting with the sell, it is, sadly, not my very worst investment in the Top 20 over the past 3 1/2 years, but pretty darn close. I had initially sized the position small due to the risks I described at the time of purchase and fortunately never added to the position. The investment was made at a time when the model was performing exceptionally well. While it proved to be a mistake, I think the error wasn't in the purchase (as bad an idea as that proved) but rather in not selling it when I realized the story had changed significantly. Even recently, I had hung on not because I thought the long-term outlook was good but rather it violated two technical rules I use to avoid selling stupidly. It still does, but the position is so small that even if it rallied 50% it wouldn't have a material impact on the portfolio. I truly apologize to subscribers for this one.
The two trims are quite different from one another, with one a loss and the other just taking some reasonable profits. Why am I trimming these positions, which were among our largest holdings? Starting with the "loser", it offers 52% to my one-year target, which is below average. It is also slightly overbought. It is a "value" stock lacking a catalyst, and it seems like we have enough of those. The trim gets it to a size that is more in line with the opportunity as I see it. The other stock reports in mid-December its year-end. It offers 54% to my target, and the reduced size more appropriately reflects the opportunity. I continue to like the company's long-term prospects, but I have to admit to being a bit fearful about the near-term prospects.
Our new buy isn't a new name. It's trading well below where we sold it this summer (32+) and even below where we had purchased it about 11 months ago. My target suggests about 58% upside. The company just reported a slightly disappointing quarter. It rallied last week but is still a bit oversold. The Chairman of the Board owns 25% of the company and, having just sold his NFL franchise, may focus his efforts here on "extracting value". This is a company I have followed from almost 5 years and in which I have confidence in management.
We are adding to a Healthcare name that was pounded on Friday amidst rumors of more potential headwinds for the Medical Device industry. I may have to adjust my target slightly lower as we learn more about the actual pending changes with respect to Medicare, but, for now, I believe that the company offers 70% upside over the next year. Like the biotech we are selling, it is oversold and is also overextended (a technical term I use to describe when a trend has persisted too long without any correction). The other name is trading right where we bought it three months ago - it has traded a little lower and then a lot higher. To my target, it offers 75%.
2009 and 2010 were years in which I could do almost no wrong in Top 20, but 2011 has proven to be more challenging than I had expected. Relative value and contrarian entries paid off handsomely last year but have been a recipe for pain this year. Value, in general, has underperformed, and I have done a poor job of adding "growthier" names. We have one name that has really disappointed me greatly (one I added as "growth"), and I will need to make a decision regarding my confidence in their future. As it stands now, it offers 72% to a target I have reduced significantly since the initial buy earlier this year. The position is a little over 3% of the portfolio. We have several other names that have performed poorly, but I have confidence in their long-term prospects. I continue to look closely at a handful of new potential names to add as well.
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