Chasing Value: 2010 Final Review -- Winners and Losers

After three quarters, Berkshire Hathaway (BRK.B) was the best performer among my selections, but EZCorp (EZPW) eclipsed everything by year end. My worst pick and black swan (dive) was Brasil Telecom (BTM) from the beginning and it ended the year pitifully.

At the end of this post, I recap my four-year record, good and bad, for all to see with the links to the original posts. I managed to beat the index three out of four years, and because of last year's sky-high results, the average is very good too.

This year, six of my picks were up and four of them were down. I added a twist in 2010 by including an option that contributed to the results; otherwise it was a push. To accurately reflect the appreciation, I included dividends for the 10 stock picks and the index.

Stock Picks: The average return for the nine stocks plus the one option was 11.771%. Adding the 2.43% dividend yield (the group average) brings the total to a 14.2% gain. Including the option, where I "sold to open" a put meant that I was adding leverage because you would not be using cash to do this. You are actually getting cash. In terms of margin, the required coverage is only 35%. This being the case, it could be argued that it would be a more accurate depiction at three times the 18.52% gain exceeding 55% -- second only to the Ezcorp.

This is actually the case in my own personal portfolio, where I did make this trade. One other point needs to be explained and that is that the option actually does not expire until January 22, 2011. This means the price below is the result of buying to close the position three weeks early. The following are the results from Dec. 28, 2009, to December 31, 2010, listed from best to worst returns:

• EZCorp (EZPW): Then $17.35, now $27.13 (+56.37%)
• Berkshire Hathaway (BRK.B): Then $65.75, now $80.11 (+21.84%)
• Home Depot (HD:) Then $29.27, now $35.08 (+19.78%)
• General Electric (GE): Then $15.34, now $18.29 (+19.23%)
• Williams Company (WMB): Then $21.25, now $24.72 (+16.33%)
• Grubb & Ellis (GBE): Then $1.33, now $1.27 (-4.51%)
• Archer Daniels Midland (ADM): Then $31.63, now $30.08 (-4.90%)
• Raytheon (RTN): Then $52.18, now $46.34 (-11.19%)
• Brasil Telecom (BTM): Then $29.45, now $21.93 (-25.53%)

Also, the E-Trade (ETFC) "Naked Put": Then $13.50 (was 1.35 before 10x1 reverse split), now $16.00 (+18.52%)

Compare the Standard & Poors 500 Index ($INX): Then 1,127.78, now 1.257.84 (+11.532%) + 1.69% dividend yield = 13.22%

If you would like to go back and review my initial thoughts on each of the stocks the following links will provide that opportunity:

#1 Berkshire Hathaway: This year BRK.B had a 50-to-1 stock split, making it more affordable for small investors. Berkshire was added to the S&P 500, replacing the Burlington Northern Santa Fe Railroad, which it acquired during the year.

#2 Grubb & Ellis: The commercial real estate market, and thus the brokerage business, did not make the type of recovery I anticipated. Clearly I was too optimistic.

#3 EZCorp: This one continues to expand and is planning still more, both domestically and abroad on all fronts with new pawn shops, cash advance outlets, and small loans. The "McDonalds" of pawn shops is still in its infant stage. EZPW was also one of my 2009 picks and sticking with it paid off. There were fears earlier in the year that stock appreciation might be limited by concerns about potential restrictions on its fees through congressional legislation. This did not materialize. During the year I posted several times about EZPW; the most recent was Chasing Value: EZCorp Better Than Apple, One Month Review

#4 Home Depot: I think investors have been speculating for the past two years as to whether the home development market would improve. Home Depot's stock has bounced around as a result. This past year there obviously was much more conviction as the stock advanced nicely with solid gains.

#5 Williams Company: Gas prices are still hovering at long-term lows. However, WMB profits from transporting natural gas, not selling it. In 2010 the company consolidated its master partnerships, rolling them up into a more focused enterprise. Energy stocks were down earlier in the year and then the wind was knocked out of them upon news of Gulf of Mexico oil spill. All indications support the idea that this just created a buying opportunity.

#6 General Electric: GE made great strides in 2010. It has cleaned up its balance sheet and Wall Street is anticipating that a dividend increase is coming in the near future. GE continues to grow and exploit enterprises in water, power, energy, and health enterprises, as it has scaled back its financial division. GE was the other of the two holdovers from last year. My patience was rewarded with solid gains.

#7 Archer Daniels Midland: ADM might be my biggest disappointment. It was not the big loser, and for most of the year it just meandered in a tight trading range. It certainly was the least speculative. For whatever reason it could gain no traction. Increased food prices and fuel prices did not seem to make a difference. Poor harvests in other regions of the world did not help. Gains seen in farm equipment stocks did not lend any support for ADM either. It has been a safe haven stock, but those looking for safety were not in the market and those that were sought growth.

#8 Raytheon: I like every thing about RTN. It is very strong enterprise with a clean balance sheet, growing businesses and experienced management. It pays a nice dividend, which it has even increased during the year. The company continues to prosper from its Patriot missile sales (very expensive razor blades, if you like) and radar systems in support of governments and private clients around the world. The stock has fallen into the bargain bin lately. See Chasing Value: Barron's Is Right About Noble, Raytheon, but Forget About Its Market Strategists. It is on the 2011 list.

#9 Brasil Telecom: What a disaster. Shortly after I suggested BTM, an unforeseen business transaction slammed BTM when a larger acquirer did not follow though on a commitment. Nine months ago, JPMorgan upgraded BTM to overweight with a $26 target. This has not panned out and these guesstimates are of little use. This particular pick is indicative of the oddity of picking stocks that you are basically forced to ride with for the duration. In most cases I would stick with my picks. I am not one to do much trading. However, even a buy-and-hold guy has to dump a stock when the reasons you bought it no longer exist. That was the case here, but for this instance that was not an option.

#10 E-Trade "Naked Put": For the first time I included an option among my picks and I'm glad I did. It paid off all year. The trade was selling to open, January 2011 puts with a $2.50 strike price, paying $1.15 per share up front. This is often referred to as a "naked put." I have been writing more and more about these as I have been using this opportunity broadly as a part of my current investment strategy. Although I did not make the entire return I hoped for, my target was such that half the gain was quite rewarding.

So there you have it. The books on 2010 are closed. Since this was my fourth annual review, I have decided it would be worth while recapping all four years, the good and the bad -- there is no hiding from the truth in this column. Each year's results are followed by the actual closing data if you care to check.

2007: My gain was 5.63% vs. the S&P at 3.62%. (2.01% better)
Chasing Value: 7 for 2007 review: Props to Cramer for his 2007 picks.

2008: My loss was -48.5% vs. the S&P at -38.91%. (9.59% worse)
Chasing Value: 2008 picks -- the last nail

2009: My gain was 52% vs. the S&P at 26.47% (25.53% better)
Chasing Value™: 2009 Results Crushed the S&P 500

2010: My gain was 14.2% vs. the S&P at 13.22% (0.98% better)

My total gain over the four years was 23.33% (5.8% average) compared to the S&P that only gained 4.4%. (1.1% average) besting the index by 18.93%, or 4.7% per year.

Happy New Year, health and prosperity to all.

Sheldon Liber is registered architect and the CEO of Chasing Value ™ Asset Management, Inc., a small private investment company. He writes the columns Chasing Value™ and Serious Money. and is on twitter: ChasingValue Disclosure: Among the positions discussed in this post, he owns stock and/or options of BRK.B, EZPW, WMB, GE, RTN and ETFC.