This article is part of our Rising Star Portfolios series.
It's been just shy of a year since the launch of The Motley Fool's Rising Star Portfolios, and my value-investing Messed-Up Expectations approach is doing just about what you'd expect in a tough market environment. The past few months have been especially difficult, but I've been doing what any long-term investor should be doing -- buying shares of beaten-up companies.
Today, I'm going to bring the positions of three companies back up to a 2% position of investable funds, given that the Fool has decided to continue funding this portfolio. The great thing for me and this portfolio is that all the share prices are near or below the price at which I originally purchased them.
|Company||Purchased||Recent Share Price||Current Expectations*|
|SUPERVALU (NYS: SVU)||2/1/11 @ $7.30||$7.66||(25.9%) / (13%) / 0%|
|Hertz Global (NYS: HTZ)||4/21/11 @ $17.18||$10.59||(0.9%) / (0.5%) / 0%|
|Dendreon (NAS: DNDN)||8/11/11 @ $10.15||$9.00||NM|
*Expectations are the growth rates for one to five years / six to 10 years / 10 years from trailing free cash flow needed to justify the recent price using a discount rate of 15% in a DCF model. NM = not meaningful.
The thesis for SUPERVALU involved a big disconnect between what the equity market and the debt market were expecting. That hasn't changed, given current expectations. Further, the company was in the midst of a turnaround, going from "terrible" to "merely bad." That has continued, with further repayment of debt (from $7.33 billion when I bought to $6.69 billion most recently) while at the same time seeing declining same-store sales but improving costs. In an environment where even Wal-Mart Stores (NYS: WMT) is having difficulty with same-store sales, it's nice to see that this investment thesis is still intact. I'll be adding enough money to this position to bring it back up to the 2% level.
Hertz's thesis, too, is still intact. This includes growing sales and net income as well as improving fundamentals like residual value (so that its used cars can be sold at higher prices) and declining days sales outstanding. The equipment-rental side of the business is doing well, also, with more equipment being rented at higher prices. Hertz is also now the only major bidder for Dollar Thrifty (NYS: DTG) , with Avis Budget Group (NAS: CAR) having dropped out. That should give Hertz a nice boost to growth. With shares down substantially from when I purchased them, little change to the priced-in expectations, and a still-intact thesis, I'm comfortable bringing this back up to a full, but small, position.
Finally, the situation at Dendreon is slowly improving. This stock was purchased after the market's strongly negative reaction to sharply reduced Provenge sales guidance came out. Dendreon has since made several steps toward improving the situation, including cutting its workforce to reduce costs and educating prescribing physicians better on Medicare reimbursement. Reimbursement time is now down to 30 days, and one physician reported reimbursement within eight days. Plus, worries about competition from Johnson & Johnson's (NYS: JNJ) Zytiga are abating, as that is currently only being used in third- and fourth-stage cancers, which is not where Provenge is used. These are good things to see, and they demonstrate that management is getting a handle on this situation to turn it around. Thus, I have no problem adding more money to this investment, bringing it back up to a full 2% position.
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This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).
At the time this article was published Fool analyst Jim Mueller owns shares of Johnson & Johnson and has an option position on Dendreon. He's an analyst for the Motley Fool Stock Advisor newsletter service. The Motley Fool owns shares of Johnson & Johnson, SUPERVALU, Hertz, Wal-Mart, and Dendreon. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and Wal-Mart Stores, buying calls in SUPERVALU, and creating diagonal call positions in Johnson & Johnson and Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy is never messed up.
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