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Back in the summer of 2010 when the market was down, the gulf was full of spewing oil and investors were running away from bad news stocks shocked most notably by BP (BP) oil spill, I decided to post a contrarian story reminding readers that the fear was overblown and created a buying opportunity."My pal Warren" has said for years that we should buy on fear and sell on greed. The toxic stock portfolio was a result of this sentiment.
This is the fourth update to my ranting eight months ago that acquiring six of the most hated, and most highly traded stocks with constant negative headlines would outperform the overall market. The theory has born fruit as the toxic stocks are ahead and the difference is increasing over time.
The toxic stocks list includes Bank of America (BAC), BP plc (BP), Citigroup Inc. (C), General Electric (GE), Goldman Sachs Group (GS) and Transocean (RIG).
Since the original story, and while the market has been rising, BP has been wheeling and dealing as it adjusts to it's new world. Goldman Sachs paid a record settlement with the SEC for the sum of $550 million and is weighing the idea of paying Berkshire Hathaway (BRK.A) back the $4 billion loan it secured during the financial crises, It has also negotiated a $500 million deal with Facebook.
The following data starts with the initial closing prices of July 16, 2010 followed by the closing prices of March 10, 2011.
- Bank of America: $13.98 to $14.26, a gain of 2.0%.
- BP: $37.10 to $45.66, a gain of 23.07%.
- Citigroup: $3.90 to $4.54, a gain of 16.41%.
- General Electric: $14.55 to $20.10, a gain of 38.14%.
- Goldman Sachs: $146.17 to $160.27, a gain of 9.65%.
- Transocean: $52.08 to $78.97, a gain of 51.63%.
The average gain for the group was 23.48%. During the same period the S&P 500 rose from 1064.88 to 1295.11 for a gain of 21.62%. The difference is 1.86% in favor of the toxic stock portfolio. This continues the trend from the beginning where the difference at update #1 was 0.23%; increasing at update #2 to 0.54%; and rising to 0.88% at update #3.
Most of the toxic stocks are still below there long term mean values and should continue to outperform. Having this in mind, I believe an investor acquiring this group even at this late date would still be able to outperform the index, because reversion to the mean for the toxic stocks is a more important factor than for the overall market which has already done so.
Sheldon Liber is registered architect and the CEO of Chasing Value ™ Asset Management, Inc.. He writes the columns Chasing Value™ and Serious Money. and is on twitter: @ChasingValue Disclosure: He owns shares and/or options in all of the stocks mentioned with the exception of GS.
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