THE FASCINATING ONE-STOCK CHALLENGE

January 2018

By John Jennings, President and Chief Strategist

I am a member of a global network of investment professionals. This past June the network had a “One-Stock Challenge” with the following rules:

  1. Submit the name of a stock by June 29th
  2. List out the rationale for choosing the stock
  3. The stock with the highest price appreciation from June 30th to December 1st would be the winner.

Simple rules! Fun! Game on!

THE PICKS:

Twenty-seven investment professionals from around the globe, including me, participated in the contest. The stock selections and rationale for purchasing various stocks were quite interesting and appeared very well-informed. There were familiar companies such as Hertz, Facebook and Blue Apron, but many of the stocks were companies I had never heard of, like Osisko Royalties and Immuron. All of the picks and their respective returns are listed at the end of this article.

For my pick, I decided to use a random stock pick generator from the internet to see how a random selection would do. The program provided me with ticker symbol NWY – New York & Company, a women’s clothing retailer. I hated this stock pick. NWY had lost 42% in the first half of 2017 and had lost 3% in 2016 as compared to the S&P 500 Index’s 12% return. The stock basically had been on a down escalator since its high in 2004, losing over 90% of its value. Ugly Ugly Ugly. I considered asking the program for another random pick, but I decided that random means random, so I went with it. Below is my official submission:

  • Name: New York and Company
  • Ticker: NWY
  • Reasons: Totally random pick – selected using a random stock picker program on a website. Let’s see how a random, uninformed pick works out.

HOW DID THE STOCK PICKS TURN OUT?

The winner of the contest appreciated 168% in price (Zogenix), and the worst performing stock lost 65% (Blue Apron). If real money had been invested in the 27 stocks equally, the group out-performed the S&P 500 Index by 4.6% during the five months of the contest (13.6% return vs. 9.0%). In terms of the pickers, 44% (12 of 27) beat the Index with their picks, while 56% (13 of 27) did worse. The median picker returned 3%.

How did New York & Company do? Amazingly, it came in fourth with a 68% return! It started at $1.38 per share and ended at $2.30 (it is currently $2.90 per share as of this writing).

WHAT CAN WE LEARN FROM THIS?

This was a fascinating exercise. On June 30th, each stock pick (except mine) appeared to be well-reasoned, yet the majority failed to outperform the S&P 500 Index. The top performing pickers probably feel pretty good about themselves. The lower performing pickers either feel badly about their picks, or most likely have some sort of justification for their underperformance such as “I was early, the stock will do well later.” Having submitted a truly random pick, I am most intrigued by the results of the contest. Here is what I learned from this exercise:

  1. There is A LOT of randomness in the stock market. My random stock pick returned better than 23 of 26 professional, informed picks. If I had happened to randomly pick NWY in almost any other time-period in the last 10+ years, I would have been at or near the bottom of the stock picks. On June 30th as I read through the stock picks and the reasoning, I had no way of telling which stocks would perform well. In fact, I poo-pooed the Hertz pick because I know quite a bit about that stock and am aware of Hertz’s struggles. Hertz finished third in the contest with a 76% return.
  2. In areas where randomness and luck are material factors in outcomes, it takes many data points to untangle skill from luck. Five months is too short a period of time to judge stock-picking ability. It could be that many of the stocks picked will turn out to be good long-term investments. Or the top performers over the five-month period could turn out to be dogs. Or the dogs might turn themselves around. Being a patient investor is essential.
  3. Most of the individual stock selections underperformed the S&P 500 Index, and eight of the 27 picks lost more than 15% during the five-month period while the S&P 500 Index was up 9%. Thus, investing in a single stock or a handful of stocks is a risky proposition. While tales of investments like Zogenix, make diversification seem less appealing, the likelihood of investing in a terrible stock, especially over short time horizons, makes a strong case for diversification.

In summary, as an investor it is important to have patience and realize the random nature of the stock market, especially over short periods of time. Having smarts, analytical ability and information does not guarantee good investment outcomes over the short-term. Diversification is the appropriate choice if capital preservation is a goal.

TABLE OF THE 27 STOCK PICKS

Ran

Stock Name

Appreciation

Reasoning for Pick

1 Zogenix 168% Big data readout coming for a treatment for Dravet Syndrome (DS) a form of epilepsy. serious management team, and smartest biotech investors are largest holders here.
2 Editas Medicine 78% Why? Because CRSPR is a next generation genome editing technology that eventually will get very high demand and this is one of two companies engaged in this.
3 Hertz Global Holdings 76%

1. Apple just announced is working with Hertz to test self-driving technology, which in my view validates the role car rental companies will play in the world of self driving (Avis stroke a similar deal with Google on the same day).

2. Just issued $1.25 billion in 5 year secured notes to pay down/redeem short term debt.

3. 52 week high is $53.14/share and low $8.52. Current price is $11.42/share (up 28% for the week based on #1 above)

4. Stock has been heavily hit by the continued decrease in used car prices. However, this is more typically a one time hit that seems to have been fully priced in the current share price.

4 New York and Company 67% Why? totally random pick – selected using a random stock picker program on a website.  Let’s see how a random, uninformed pick works out.
5 Kilgore Lake Gold Resources 53%

This is a high alpha bet on the price of gold. The reasons why I think Gold will go up are the following:

1. Trouble in the Middle East.

2. Donald Trump having execution difficulties at home.

3. Higher Interest Rates in US, Japan and Europe.

4. Brexit.

5. Trade wars.

6. Climate change and costs of fixing it.

6 Thor Industries 45% Thor is in the RV market and the demographics continue to line up to fuel double digit growth.  Fuel prices will remain low for the foreseeable future and backlogs have grown significantly over last few quarters on a relative basis.
7 Midstates Petroleum Company 34% Stock trading at multiyear low.  Good fundamentals.
8 Applied Materials Inc. 26%

1. Taken a dip in the recent sell off.

2. Trading at an attractive P/E ratio compared to semis index and S&P index.

3. 35% 5yr EPS growth.

4. Semis and industry is on a roll and are really innovating

9 Aecon Inc 25% Infrastructure company with leverage to recovery in energy.
10 GW Pharmaceuticals 23% GWPH is a biopharmaceutical company which engages in the discovery, development and commercialization of novel therapeutics from proprietary cannabinoid product platform in a broad range of diseases.
11 BOFL Holding Ltd. 17% As interest rates rise, its branchless, affinity partner channel marketing, and safe loan dispersion methods will help profits continue upwards.  Peer comparison is also relatively cheap ROE, ROC, and OPEX are better than C or BAC.  3 year past and expected future sales and EPS growth is pegged at 30% annually.
12 Facebook, Inc. 16% I’m picking FB, down yesterday good time to buy, totally crushing Snap.
13 KKR& Co LP 7% PE is 10x trailing, 8x forward, dividend yield is 3.5%, P/B is 1.35x ; Mkt Cap = $15 B, Excluding Book Value “Capital Light ” Business valued at $5 B. “Capital Light” business comprised of : (i) Recurring management fee profit stream approx. $400 m +  (ii) roughly similar earnings potential for Performance fees (Carried Interest).  Valuation looks cheap relative to profit stream from recurring management fees and performance fees.
14 Richmont Mines Inc. 3% With equity markets at all-time high, this contrarian play is a hedge against a market correction. With the price of gold in a trading range, I expect that the price may experience a breakout. Richmont Mines Inc. (RIC) is a high-quality gold mining company with low debt and a stock price a good approx. 20% off the 52-week high.
15 Rentacenter -2% MANAGEMENT SHAKEUP; PE 9X; YIELD 2.79%; BOARD BATTLE, ACTIVIST INVOLVED; RIPE FOR TAKEOVER.  Other than that, who knows.
16 Osisko Royalties -3% Recently completed 1.2 B acquisition of portfolio of diversified royalties. Holding strategic positions in couple of largest upcoming gold mine developments in North America. As newly acquired royalties are from diamond, gold and metals, giving a bit more diversification for future.
17 Lonmin -5% I spoke at Ira Sohn HF charity event last week. Basically Hedge Funds give their best idea and the attendees if they buy and profit are encouraged to share a portion with the charity [Brain Cancer] . I have posted my idea – Lonmin in the documents section.
18 Pacira Pharmaceutical -5% Pacira, who developed a non-opioid solution for post-surgery pain control, has a recently signed a distribution agreement with J&J. The J&J sales reps are currently being trained on the product.
19 Fireeye, Inc -7% Trends in cyber security over the coming months
20 Grana y Montero -15% Construction and infrastructure company that is facing significant upside from infrastructure development plans in Peru.
21 California First National BankCorp -18%

Thesis- ran a two second screener with the following information:

  1. Stocks that are over $5, Massively overbought (greater than 90% overbought in this case) – I didn’t want a laggard stock that would sit still and I wanted to get as much volatility as I could.
  2. Stock was a microcap to give small size and float an advantage.
  3. Stock was profitable, could probably have done better if the stock was unprofitable because people would have speculated more, but I wouldn’t invest in an unprofitable business myself.
22 Sierra Wireless -22% Semi-Conductor company that is growing because of the chips it sells in the Internet of Things space. Additional growth to come from penetration into Auto markets.
23 Platform Specialty Products Corporation -24% Platform Specialty Products Corporation produces and sells specialty chemical products in the Americas, the Asia-Pacific, and Europe. It operates through two segments, Performance Solutions and Agricultural Solutions. Undervalued… market vs the metrics don’t align.
24 Conatus Pharmaceuticals Inc -27% After taking off on large of volume in December 2016, it has stepped back showing signs of restarting an upward movement.
25 Rite Aid -35% Oversold after original merger with Walgreens Boots Alliance (NASDAQ: WBA) was modified. Walgreens will purchase almost 2,200 stores and certain distribution assets for $5.175 billion, in addition to paying a $325 million termination fee on the original deal. Sales and adjusted EBITDA for the remaining stores are higher than the chain average. The key is that in the agreement with Walgreens, it will allow Rite Aid to become a member of Walgreens group purchasing organization, which is highly beneficial and will allow Rite Aid to improve pharmacy margins drastically.
26 Immuron -41% Extremely undervalued Microbiome biotech newly listed Australian and Israeli technology with many major inflection points over the next 12 months.
27 Blue Apron Holdings Inc. -65% IPO in hangover time. 78MM in 2014 to 795MM in 2016. Strongest presence in market and now more money to grow. Reduced IPO price by 33% just because Amazon bought Whole Foods.

Aggregate return:

13.6%