Portfolio A1 Stretches Margin Over SPX to 9.6%

Continuing the strong bounce off of the mid-August lows, Portfolio A1 exited the week with fewer scars than that of the benchmark S&P 500 index. Now up 13.3% since the February 16, 2007 inception, the portfolio’s performance compares favorably to a 3.7% gain in the SPX. In spite of the recent performance, as I have discussed previously, I will retire the 100% mechanical Portfolio A1 at the end of the calendar year and replace it with a more complex portfolio that incorporates some discretionary thinking and more active management on my part.

This week one marginal performer, Shanda Interactive (SNDA), the Chinese internet company, is being dropped from the portfolio and will be replaced by StatoilHydro (STO), the state-owned Norwegian oil giant.

There are no other changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Mosaic (MOS) Continues to Lead Portfolio A1

The title is probably a considerable understatement, but what else can you say about a stock that is up 91% in only ten weeks in the portfolio?

The amazing run of The Mosaic Company (MOS) has helped to push Portfolio A1’s performance to a cumulative return of 14.15% since the portfolio inception on February 16, 2007. This is 8.67% better than the 5.48% returned by the benchmark S&P 500 index during the period.

Mosaic’s performance has triggered a number of thoughts about portfolio design, backtesting, and the likelihood of catching lightning in a bottle. Simply stated, in the 8 ½ months that Portfolio A1 has been up and running, it has purchased 27 stocks. Almost half of these stocks are up 50% during this period and 30% (MOS, DRYS, BRP, PCU, PBR, RIO, CNH, and SNDA) are up an astonishing 100% or more. The bottom line is that I believe it is possible identify stocks that have a high likelihood of doubling or tripling in one year (with attendant risk, of course) and build portfolio rules to maximize the probability of capturing those gains during the time they are held in one’s portfolio. I will expand upon this going forward, but Portfolio A1 should provide some evidence to support that contention.

There is one change to the portfolio: Navistar International (NAVZ) has been dropped and is being replaced by returnee PepsiAmerican (PAS), the beverage bottler. There are no other changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Portfolio A1 Reconsiders DryShips (DRYS)

Last week I expressed my surprise that the portfolio had decided to sell out its position in DryShips (DRYS) after the stock registered a 27% gain in just four weeks in the portfolio. In retrospect, my skepticism looks warranted, as DRYS logged an 8.9% gain last week, while the stock it was replaced with, Shanda Interactive (SNDA), was only able to add 0.3% during the week. That differential, which meant a net of about 1.7% to Portfolio A1 last week, accounts for all of the 1.4% lost relative to the benchmark S&P 500 index last week.

Ironically, Portfolio A1’s stock ranking system has reconsidered this week and decided to add DryShips (DRYS) once again, while dropping the one other stock that has had two round trips in the portfolio: Terex (TEX).

While Portfolio A1 continues to try to run down the S&P 500, I am refining the next iteration of my public portfolio in the background and am readying for a January 1, 2008 launch. One of the most important changes is that this portfolio will not be a 100% mechanical system. It will be partly discretionary, so that I will be able to make decisions along the lines of overriding a sell signal in DRYS, if I don’t think it is appropriate.

There are no other changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Portfolio A1 Jumps 5% in Week

As the equity curve below shows, the August plunge has largely been eradicated in September, thanks in part to an impressive 5% gain in the portfolio last week. The strong week puts Portfolio A1’s cumulative return back into the plus column, with gains since the February 16^th inception now at 1.8%. While this performance continues to trail the 4.9% gain registered by the benchmark S&P 500 index during the same period, an optimist might venture a small smile for the first time in about two months.

One unusual aspect to last week’s gains is the decision by the stock ranking system to drop DryShips (DRYS) after a stunning 27% gain in just four weeks in the portfolio. This is the first time the portfolio has dropped a double digit gainer and it is a little bit of a head scratcher, but perhaps the stock ranker has turned HAL on me taken up to reading Investor’s Business Daily, specifically a Friday article titled Smiling Dry-Bulk Shippers See The Boom Times Lasting For Years.

To replace DryShips, the portfolio has decided to dive headlong into China by picking up Shanda Interactive (SNDA), the Shanghai-based interactive entertainment company. In my discretionary trading I am short China stocks at the moment, so this portfolio may provide yet another interesting competition between man and machine.

There are no other changes to the portfolio this week.

A snapshot of the portfolio is as follows:

CNBC Loser’s Bracket:: #1056 (Top 1%)

For those who may be interested, the CNBC Million Dollar Portfolio Challenge is winding down this week, with 20 top performers duking it out for $1 million paid out over many years through an IV drip, while the Second Chance Showdown contestants get another shot at glory in the loser’s bracket – with a Sony home entertainment system as a consolation prize to the winner.

I never had a chance to properly chronicle the true extent of my rise and fall in the first round of this contest, as CNBC wiped away the details before I do a proper post-mortem. All I know is that after peaking at the top 0.08%, I fell down to about the top 11%, finally finishing something like 200,000^th, perhaps even lower.

The good news is that the contest gave me an opportunity to test some ideas about how to find stock that were about to make a significant move. Since the end of the contest fell in the middle of earnings season, I focused on companies that were due to report in the next 24 hours and published the details of my formula and some associated free public information sources in “How to Find the Spiker Before the Earnings Announcement” on May 9^th. Recently, I went back and evaluated the 16 companies that I invested in as a result of that earnings spiker formula and discovered that the minimum next day move for those companies was 1.5%, while the maximum move was 30.2% (down in this case), with a mean move of 5.6% and a median move of 3.7% – all of which is based on a one day holding period.

Armed with this information, I thought I should put the same formula to work again in the loser’s bracket. Once again it has been successful, with my last four picks being a 3.0% gain in PETM, a 7.7% gain in FMCN, a 5.3% gain in TSL, and a 3.0% gain in SNDA. The bottom line is that this performance has put me in the top 1% of the current contest at #1056.

Before I start patting myself on the back, however, it looks like I may have shot myself in the foot. Shanghai-based Shanda Entertainment was a solid earnings pick and turned in a very strong quarter, but it appears I was foiled by my own Lost in Translation moment and accidentally sold prior to earnings. To make matters worse, I jumped from the Shanda rocked onto GameStop (GME), whose doubling of revenues was offset by lukewarm guidance. I got my volatility again, but GME is currently trading down 3.6% on the day.