One Person's Trash Is Another Person's Treasure Portfolio

Last November, I announced my intention to create a portfolio of 10 companies that investors had effectively thrown away and given up on, in the hope of showing that deep-value investing and contrarian thinking can actually be a successful investing method. I dubbed this the "One Person's Trash Is Another Person's Treasure" portfolio, and over a 10-week span I highlighted companies that I thought fit this bill and could drastically outperform the benchmark S&P 500 over the coming 12 months. If you're interested in the reasoning behind why I chose these companies, then I encourage you to review my synopsis of each portfolio selection:

Now let's get to the portfolio and see how it fared this week:

Company

Cost Basis

Shares

Total Value

Return

Exelon

$31.25

31.68

$904.46

(8.6%)

QLogic

$11.46

86.39

$1,065.19

7.6%

Dendreon

$5.97

165.82

$432.79

(56.3%)

Dell

$13.37

74.05

$1,018.19

2.8%

Staples 

$13.48

73.44

$1,155.95

16.8%

Arkansas Best 

$10.83

91.41

$2,601.53

162.8%

Arch Coal 

$7.03

140.83

$590.08

(40.4%)

Skullcandy

$6.71

147.54

$914.75

(7.6%)

Orange 

$11.64

85.05

$1,172.84

18.5%

Xerox

$8.16

121.32

$1,191.36

20.3%

Cash

   

$0.06

 

Dividends receivable

   

$140.40

 

Total commission

   

($100.00)

 

Original investment

   

$10,000.00

 

   

S&P 500 performance

     

17.4%

Performance relative to S&P 500

     

(5.5%)

Source: Yahoo! Finance, author's calculations.


This week's winner
As a surprise, biotech underperformer Dendreon topped the list of gainers this week, advancing 16% after a Bloomberg News report noted that the company had hired JPMorgan Chase as its advisor and it may be seeking a buyer. Buyout prospects could bring a higher price, which has investors excited, but it will take just the right type of buyer, given how far Provenge has fallen behind its peers in the U.S. and the EU. A buyout is certainly no sure thing, but it was enough to propel Dendreon to the top spot this week.

This week's loser
On the flipside, it was a miserable week for printing and IT services company Xerox , which dropped 8.5% after reporting its third-quarter results and forecasting weaker-than-expected fourth-quarter EPS. Although third-quarter revenue improved 3% to $2.94 billion, and it did top EPS estimates by $0.01, a fourth-quarter restructuring charge caused its EPS forecast to fall $0.01 to $0.05 shy of the consensus. Many investors view this as a failed turnaround, but I see it as a potentially perfect entry into the stock. The majority of its revenue now comes from its higher-margin services sector, and Xerox is set up to be a huge beneficiary of the Obamacare rollout. This isn't your parents' Xerox, and it certainly deserves another look.

Also in the news...
In addition to Xerox, we had three additional earnings reports on tap this week. Let's have a closer look at each one.

Electric utility Exelon reported its third-quarter results yesterday, delivering $6.5 billion in revenue, down about 1% year-over-year, as adjusted EPS improved by a penny to $0.78 from the year-ago period. Exelon was able to use a combination of lower expenses and a solar project tax benefit to help boost its bottom line despite weaker energy prices and stiffer competition across its operating regions. Comparatively, Wall Street had been expecting Exelon to bring in just $6.2 billion in revenue and EPS of $0.66. Exelon also narrowed its full-year EPS outlook, shaving $0.05 off its previous top- and bottom-line figure, to a new $2.40 to $2.60 range. At somewhere between 11 and 12 times this year's EPS, I remain quite confident that a turnaround in Exelon is on its way.

If not for Dendreon, server and storage networking infrastructure products manufacturer QLogic would handily have been the week's biggest gainer, up 10%, after reporting stellar second-quarter results. Ironically, it may not have looked like a great quarter initially, with revenue down 4.5% over the prior year to $112.6 million, but tight cost controls related to its previously announced restructuring allowed it to net an adjusted profit of $0.23 per share, $0.04 better than expected. With infrastructure spending beefed up because of heavy spending from telecom service providers, I suspect we're about to see an earnings boom in companies like QLogic.

Finally, audio accessories maker Skullcandy reported its third-quarter results after the bell last night, delivering a nearly 30% decline in net sales to $50 million as adjusted EPS sank to just $0.06 from $0.23 in the year-ago period. Despite what might appear to be miserable results, Skullcandy's profit topped expectations by $0.04 while its revenue fell short of estimates by more than $1.5 million. The company's plan, which involves tightening its belt and improving its distribution efficiency appears to be slowly paying off with international sales also gaining traction. I'm still holding on to Skullcandy in my own portfolio and plan to continue to do so.

A new addition
The Dell drama is officially over. Dell was taken private as of the close on Tuesday, and I have taken the luxury of placing a final closing value of $13.75 on shares in the portfolio as well as paying out the $0.13 special dividend due to shareholders. By next week I will have introduced a new stock to this portfolio to take Dell's place and will add the profit realized from Dell to the "cash" portion listed in the table above.

We can do better
Don't call it a comeback, but the One Person's Trash portfolio once again outperformed the iconic S&P 500 in an overwhelmingly bullish week. Not bad for a group of deeply undervalued and contrarian stock plays! Arkansas Best and its 163% gain since inception is clearly a big reason this portfolio is tracking so closely to the S&P 500, but earnings reports have also been another decent growth-driver. We've witnessed multiple times when this portfolio outperforms on even the slightest move lower in the index, so I continue to believe that over time this group of stocks is set to outperform the broad-based S&P 500.

Check back next week for the latest update on this portfolio and its 10 components.

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The article One Person's Trash Is Another Person's Treasure Portfolio originally appeared on Fool.com.

Fool contributor  Sean Williams owns shares of QLogic, Dell, Skullcandy and Orange, but has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle  @TMFUltraLong . The Motley Fool owns shares of, and recommends Orange. It also owns shares of JPMorgan Chase and Staples, and recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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