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Steven Chen
Steven Chen
Articles (72)  | Author's Website |

Performance Review of Our Annual Stock Picks

And stay tuned for our 2020 picks

Over the past couple of years, we hve annually published our list of stock picks. These picks are purely based on our evaluation of business fundamentals, with no consideration in terms of valuation. As a result, they are theoretically for an ultra-long-term holding.

Despite the time horizon, we found it useful to conduct a performance check as an annual tradition to keep readers (and us) updated. So before we reveal our 2020 picks, here comes our annual review for 2019.

2018 picks

At the end of 2017, we picked 13 stocks from both U.S. and international markets. In 2018, a portfolio consisting of these stocks outperformed both the S&P 500 and MSCI ACWI (All-Cap), which we regard as the global total market index. Over the past 12 months, the hypothetical portfolio delivered a price-weighted average return of 27.4%, outperforming ACWI’s 23.8% but underperforming the S&P 500’s 29.88%.

The top three leaders for the year from that portfolio were Apple (NASDAQ:AAPL) (a total return of 113.33%), NetEase (NASDAQ:NTES) (47.94%) and Nike (NYSE:NKE) (35.45%). At the same time, Rollins (NYSE:ROL) (-7.61%), Gilead Sciences (NASDAQ:GILD) (-0.63%) and Credit Acceptance (NASDAQ:CACC) (4.87%) were among the top laggers. We notice that the “biggest loser,” Rollins, had an awful year of significant underperformance, mainly due to valuation contraction. The business is still in good shape, with high returns and profitable growths like before. The company stopped repurchasing its shares as the hefty valuation persisted. Therefore, we think that the underperformance (of the stock price against the benchmark as well as against the business performance) could be a healthy one from a long-term perspective.

2019 picks

For 2019, we picked 26 stocks in total, including 13 U.S.-based names and 13 international ones. A hypothetical portfolio consisting of these 26 stocks on a price-weighted basis would have beaten both the S&P 500 and MSCI ACWI, with a total USD return of 30.6% for the past year.

Evolution Gaming (OSTO:EVO) (155.09%), Apple (113.33%) and M3 (TSE:2413) (106.77%) ranked as the top return contributors for this portfolio in 2019, while top laggers included NetEnt (OSTO:NET B) (-42.45%), Craneware (LSE:CRW) (-8.47%) and Rollins (-7.61%). The stock price of NetEnt was almost cut in half during the period, as the business fundamentals deteriorated from being superb to being decent. As shown in the chart below, the trailing-12-month free cash return on assets dropped from the recent top of 56% in 2018 but still managed to maintain at a double-digit level last year. In the meantime, the business is still very profitable and cash-rich, with an operating margin and free cash flow margin of around 30% and 27%, respectively.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We own shares of Apple, Rollins, Nike, Credit Acceptance, Evolution Gaming, NetEnt, and Craneware.

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About the author:

Steven Chen
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital), and Urbem Capital, the research boutique that focuses on the highest-quality 0.1% of all public companies worldwide.

Visit Steven Chen's Website


Rating: 5.0/5 (3 votes)

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Comments

Zoltan Nagy
Zoltan Nagy - 4 days ago    Report SPAM

Assuming you bought NetEnt, what would you do now? as
1. price is down cca 50%, but most importantly, that
2. the company is loading up on debt, going from zero debt to 60% debt to Total assets?

Thanks.

Steven CHEN
Steven CHEN premium member - 4 days ago

Thanks for the comment! We don't disclose whether we would buy or sell any name. But in general, we know two things for sure: 1) the dropping price is always a good thing, given the value does not change much; 2) a turnaround is always more difficult than it appears to be.

Please leave your comment:



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