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:

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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

$888.94

(10.2%)

QLogic 

$11.46

86.39

$1,065.19

7.6%

Dendreon

$5.97

165.82

$419.52

(57.6%)

American Eagle Outfitters

$15.49

63.91

$1,027.03

3.7%

Staples 

$13.48

73.44

$1,168.43

18.1%

Arkansas Best

$10.83

91.41

$2,897.70

192.7%

Arch Coal 

$7.03

140.83

$605.57

(38.8%)

Skullcandy

$6.71

147.54

$892.62

(9.8%)

Orange 

$11.64

85.05

$1,109.90

12.1%

Xerox

$8.16

121.32

$1,339.37

35.3%

Cash

   

$28.28

 

Dividends receivable

   

$147.38

 

Total commission

   

($100.00)

 

Original investment

   

$10,000.00

 

   

S&P 500 performance

     

18.6%

Performance relative to S&P 500

     

(2.7%)

Source: Yahoo! Finance, author's calculations. American Eagle Outfitters replaced Dell, which was taken private in October.


This week's winner
All hail trucking company Arkansas Best , the One Person's Trash Is Another Person's Treasure's portfolio savior. Arkansas Best leaped from goat to glory this week, gaining 19.5% after reporting better-than-expected third-quarter results. For the quarter, the company delivered revenue growth of 7.9% to $623.4 million as adjusted profit per share more than doubled to $0.54 from the $0.24 it reported in the year-ago period. By comparison, Wall Street was forecasting just $0.37 in EPS, so Arkansas Best's results crushed estimates. With the company's five-year labor agreement now ratified, don't be surprised if this company keeps driving its results higher.

This week's loser
On the downside, we have electric utility Exelon , which shed 3.3% on the week despite no particularly pertinent company news outside of it going ex-dividend as of yesterday. The real reason Exelon has been left in the dust on this recent rally is that electric utilities are, by nature, defensive plays. Few investors have needed downside protection during this seemingly endless rally, choosing instead to chase growth stocks, which Exelon certainly isn't. Until we see fear reintroduced into investors' minds, Exelon may struggle to move higher.

Also in the news...
So much for my cautious words about new entrant American Eagle Outfitters last week because the teen retailer did exactly what I suspected and updated its preliminary third-quarter guidance for the better late last week. American Eagle Outfitters had previously guided to an EPS range of $0.14-$0.16 for the third quarter, but now expects to report a profit of $0.19 per share despite a 6% decline in revenue and 5% drop in same-store sales. It's been my contention for a while that American Eagle's niche pricing and smart inventory management make it the superior choice among teen retailers -- and its preliminary guidance would certainly suggest my thinking has some merit.

The pain continued for struggling biotech company Dendreon this week, despite its share price rising modestly after it reported its third-quarter earnings results. For the quarter, Dendreon's revenue fell by 12.8% to $68 million as the company struggled with tougher competition in the U.S. for its advanced prostate cancer drug Provenge. Net loss shrank considerably to just $0.44 per share, but still came in $0.01 worse than expected. The real hit came when Dendreon noted it would undergo another restructuring where it'll shed costs in all operating segments, including another 15% workforce reduction, in order to save $125 million annually. On the heels of this report, research firm Brean Murray lowered its price target on Dendreon from $2 to a laughable $0.50.

Finally, Xerox shares reversed their recent weakness and chugged above the $11-per-share mark after announcing an expansion of its share repurchase program by $500 million and following positive comments made by CEO Ursula Burns. Burns released fiscal 2014 guidance of $1.10-$1.16 in EPS that was in line with Wall Street's estimates, but really excited investors with the projection that IT-service revenue will increase to 66% of total sales by 2017 from its current rate of 56%. I believe Xerox offers investors an opportunity for rapid yet consistent growth in the health-care sector, and Burns' projections only reinforce that view for me.

We can do better
As per the norm, I can give a bunch of credit to Arkansas Best for making this a market-topping week and credit the portfolio's bottom feeders for holding the portfolio back from bigger gains. I've been saying for some time that all we would need is one other company to step up for this portfolio to surge ahead of the S&P 500 and it's looking like Xerox just might be that company. We still have a ways to go, but I remain confident that this group of deeply discounted and contrarian names can handily outperform the 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, Skullcandy and Orange, but has no material interest in any other 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 recommends and owns shares of Orange. It also owns shares of 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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