RD's Picks

The week started off well with the portfolio threatening to edge over $10 per share at lunch-time Monday. Then, American Railcar Industries (ARII) reported earnings after the close (the train wreck). Revenues were well ahead of estimates, but they missed earnings badly. ARII was about 10% of the portfolio and I was expecting a strong quarter. Time to bail out. I put in two limit sell orders, one for 2/3 of the position at a price I was pretty sure would execute based on the after hours activity and the other 1/3 at a more optimistic price. Net result was I unloaded all but about 200 shares at 31.70 - 32.35, three or four dollars a share below my buy price. Holding on would have been much worse since it ended the week at 26. It was a big loss in the contest, but selling right away with reasonable limits helped keep it from being a disaster.

As I mentioned in last week's summary, I wanted to add a U.S. based defensive stock. Since I already had a drug company (Novartis) and consumer products (Unilever plc), I was looking at a beverage company. After a little research, I selected Anheuser Busch (BUD) over Pepsi (PEP), Coca-Cola (KO) and Molson-Coors (TAP). It was a tough call between the four. Had I been looking for more of a growth stock, TAP would have been my choice. Pepsi and Coke also fit the US defensive stock bill well, but in the end I liked BUD's slightly higher dividend. Besides, in the words of a Tom T. Hall song, "I like beer." Diageo is also attractive for this role, but I wanted something U.S. based since my other two defensive plays are based in Europe. Much of the cash from selling out of ARII went to building a position in BUD over the course of the week.

While researching these stocks, I stumbled across Rocky Mountain Chocolate Factory (RMCF) a little company that looked pretty interesting. RMCF is a $100 million market cap producer and retailer of chocolate. It trades at 15 times forward earnings and is estimated to grow earnings by over 15% next year. The company trades at about $15.50 a share, has 41 cents a share in cash and no debt. Margins look good and the current dividend yield is 2.4%. RMCF recently entered into an agreement with The Grove to market their chocolates in a number of airports. It's not a great SLO stock because it's thinly traded, so it's tough to build much of a position. I did put in a small position and may add some to it if the price stays low. One of my goals is to have fun with this contest and who doesn't like chocolate? I'm slightly ahead with it, a pleasant change from most stocks in this portfolio to date.

I also tried the strategy I outlined last week - placing lowball buy and premium priced sell limit orders trading around core positions. I made a little money doing this, but it's tough to have much impact without risking a big chunk of your portfolio. I've been setting the buy and sell prices by looking at the recent range and making a guess, probably not the best approach, but I don't have a better method. As you might expect, this past week the lowball buys tripped more often than the premium sells. Basically built up the BUD position, added a little to CSCO and had some success trading PSEC and MTSN.

Global SanteFe, my biggest holding, continues to be a disappointment (read loser). It had a nice pop on Friday, but just made back Thursday's losses. I haven't given up on it yet, but also haven't added any more. There hasn't been any news to account for the price weakness. My best guess is the big debt load that's part of the Transocean merger is causing worries. I like the merger, but would like it better without the special dividend and debt. The merged company can handle the $15 billion in added debt, but it does limit the ability to tap credit markets if the need arises. Without the special dividend and debt, shareholders could always decide to pay themselves by selling part of their new shares - same basic outcome, but without all the debt. GSF has been the cheaper way to buy the new company every time I've compared the price to RIG. If anyone has any insight or theories why this has been such a dog, please post a comment.

Thanks to the Fed discount rate cut, Wells Fargo closed out the week strong (the soaring stagecoach). Bank of America carried its share of the load as well. I sold a small piece of each of them on Friday looking to buy back if the price pulls back next week. Cramer's show Thursday was bullish on WFC as a strong bank that would survive and thrive when the smoke clears; BAC was also mentioned favorably. I agree with him, even though he's little late to the party :)

At week's end, the portfolio is roughly 65% in income producing stocks, 30% in growth/cyclical and a little less than 5% in cash. I raised a little cash on Friday, but am looking for the strength from the discount rate cut to carry over into next week. Going forward, I'm waiting for GSF to quit bleeding and show a little strength, then lighten up on it. No other major moves planned. I'll continue trading around some of the positions to try and capture a few $$ off volatility.

An indication of how difficult it is to do well in this market is that even after Friday's run up, only 55 of 1771 players listed in the standings had positive returns; 414 have losses (including yours truly) and 1302 hadn't started trading yet (what's up with that). Hats off to those who have maintained $10+ share prices in their funds.

I was also honored to have my Cisco write-up from last week selected for one of the featured blogs.

Take care and thanks for reading.

Disclosure: I own shares of CSCO, WFC, GSF and PSEC.

Comments: View Comments |  Saturday August 18, 2007