CNBC Million Dollar Portfolio Challenge: Top 0.2%

This seems to be as good a time as any to provide an update on my dalliances in the CNBC Million Dollar Portfolio Challenge. At the moment, I stand as #2091 out of 1,246,562 contestants – my best showing to date. While I am delighted to be sporting a 57% return and have so many contestants in my rear view mirror, I decided a week ago that each day I would put all my chips on a particularly volatile stock in hopes of maximizing my chances for reeling in those who are ahead of me.

As you can see from the trades outlined below, my goal is to maximize volatility in my portfolio more than it is to pick winners. In the process, I have developed a system for picking potential earnings spikers that I will be glad to provide some more details on when the contest is over. In the meantime, I will be the first to acknowledge that skill is not a significant element in this contest, unless you consider it a skill to be able to develop a portfolio that will have a week to week volatility of at least 25%.

Here is a recap of what has transpired in the past seven trading days.

I started my single stock approach by tempting fate with an ‘all in’ bet on Vertex Pharmaceuticals (VRTX) on Friday the 13^th. It looked like a disastrous move when VRTX traded down 6% before the market opened on Monday and opened off more than 5%. Fortunately, VRTX rallied slowly over the course of the day, finishing down only 0.8%. I was impressed by the reversal, held on for another day, and was rewarded with a 5.9% gain. I made the mistake of holding one more day, however, watched VRTX drift sideways, and dumped it at the end of the third day.

In my worst move and only losing trade of the contest so far, I rolled the dice on earnings AMC Wednesday. EBAY looked like the obvious high flier trade, so I went against the crowd and went all in on NVLS, losing 5.8% of my portfolio and negating the gains from VRTX.

Thursday night I sold NVLS and hopped on the OO express. Oakley turned in a great quarter in terms of both revenues and earnings, raised full-year guidance, and saw their stock jump 11.7% the next day.

By Monday morning, I was back at the earnings roulette wheel, with all my chips riding on Arch Coal (ACI) – and they handily beat expectations, trading up over 7% at one point during the day and finishing the day up 4.4%.

Today looks to be an even better day for my single stock ‘portfolio,’ as AK Steel (AKS) turned in another strong earnings report, pushing the stock up 5.8% as of this writing.

I still think it will take a portfolio of at least $3 million to make it to the top ten and get a pass into the finals. Assuming I can hold on to today’s gains in AKS, that means it will take a minimum return of 22% per week (compounded) over the last three weeks to put me in the ballpark. That type of performance is not impossible, but time is becoming a a more significant obstacle each day.

If my good fortune continues, I will provide more frequent updates…

On Risk, 'Real Money,' and the CNBC Million Dollar Portfolio Challenge

A reader wrote to say that when he read that I had bought VRTX for the CNBC Million Dollar Portfolio Challenge, he decided to follow me in that trade with money in his IRA and was interested in hearing about my next pick as well.

I was more than a little surprised to hear this, but since I do not have a disclaimer on this site (I was wondering how long I would be able to get by without one) this seems like a good time to repeat my reply here:

While I appreciate the vote of confidence, I feel obliged to note that my intent in this CNBC contest is not to build a solid portfolio in risk/reward terms, but to take as much risk as possible in order to maximize the probability that I will be able to finish in the top 10 contestants by 5/14 and thus get a shot at the $1 million that comes in the subsequent runoff.

As a result, I am betting my entire portfolio on the riskiest stocks I can find. This is something I would never do in real life -- and I know from experience that my risk tolerance is probability in the 99th percentile for the investor community, but given that there are 900,000 entrants and 10th place is already up 156% in just 6 weeks, I have no choice.

Going forward, I will not be 'investing' in the traditional sense of the word, but rather rolling the dice with the most volatile stocks I can find. After the market closes, we have earnings reports from ESLR, IWOV and STX, among others. These three stocks all have betas above 3.0, so I will likely jump on one of them in hopes of making a big move, but I would strongly recommend that someone using real money not follow a strategy like this.

I hope that disclaimer didn't sound too preachy.

FWIW, my 'real money' take on VRTX is bullish, though I'd probably be moving up trailing stops to protect profits at this point. The problem is that in terms of 'contest money' I need to double my money (at least) in the next 4 weeks and VRTX won't be able to help on that scale.

I hope this helps.

This and That (Mostly That)

Some thoughts for the VIXophile in all of us:

• Bill Rempel has the second installment in his “Deconstructing the VIX” strip tease (no tipping allowed)
  
  
• The dk report weighs in on feline symbiosis and what it means for the VIX
  

…and the AndMoreophile too:

• The CXO Advisory Group concludes that the CPI does not provide useful trading signals and the Leading Indicators aren’t much better
  
  
• Menzie Chinn of Econbrowser offers a post-mortem on post-modern macroeconomic policy
  
  
• …and Econbrowser counterpart James Hamilton has an interesting look at the effect of tax changes on the economy
  
  
• Toro’s Running of the Bulls on the decline of corporate cash flows
  
  
• TickerSense takes a look at home price forecasts. It’s not pretty, of course, but for once my local San Francisco market looks better than most
  
  
• …but also notes that yesterday’s record new highs for 2007 is bullish, at least for the short term
  
  
• Stephen Dubner at the Freakonomics Blog with the amazing story of “How the Crack Dealer Became a Chef” – at the Bellagio, no less
  
  
• Paul Kedrosky of Infectious Greed has a chart that is guaranteed to revert to the mean
  
  
• Uglychart.com has a possible solution to the nation’s debt problems

Finally, some have wondered what I did about my ‘all in’ bet on VRTX last Friday for the CNBC Million Dollar Portfolio Challenge. Well, I took a beating on Friday and for the better part of yesterday, but when it rallied to almost fill the gap late yesterday, I decided to hold on rather than jump into an earnings play, so my patience is being rewarded today. My thinking was along the lines that I always look very closely at the second day of price action after announcements of FDA decisions or key clinical data for biotechnology companies; I saw yesterday's reversal as an opportunity not only to confirm a 15 month low, but signal the 10+ million short shares that it was time to cover. While I may make a little money today, I am not closing the gap on the leaders and time is becoming my enemy. Now it looks like it is time to roll the earnings dice…

I’m Moving ‘All In’ on VRTX

Well…kind of. Specifically, I am putting all $1.4 million that I have in my CNBC Million Dollar Portfolio Challenge portfolio into Vertex Pharmaceuticals.

My thinking is that while I am still somewhat pleased to be listed in the top 1% of contestants, each day the top 10 contestants widen the gap between my steadily growing portfolio, which is gaining about 3% or so a week, and their vast fortunes. As of this writing, I now find myself more than $1 million away from making it in to the top ten list.

The catalyst is coming tomorrow, when Vertex will present some new clinical data on telaprevir (VX-950,) a promising Hepatitis C drug, at a conference in Barcelona. Depending upon what is presented, the fallout with likely have a dramatic effect on the stock price of VRTX, whose calls currently have an implied volatility of about 78.

Adam Feuerstein of TheStreet.com did an excellent job of sizing up the situation for Vertex and telaprevir in February. Earlier today, 24/7 Wall St. summarized the options play on Vertex and talked about it as a potential “next Dendreon.”

As I see it, I probably need to make at least another $1.5 million, probably more, in the month remaining just to have an outside shot of finishing in the top ten. Ironically, this is not necessarily a desperation play on my part. If ten or more other people make bigger bets on VRTX than I do and the stock soars, then I’m that much farther out of the money. So…in this strange world of stock market competitions where high risk trumps good portfolio management skills, VRTX is both an offensive and defensive play on my part.

Looking ahead, if there is good news on Saturday (and Monday), I’ll increase the level of transparency on my thoughts and actions in this contest a little. If not, then I’ll put this subject on the back burner and move on to other subjects.