Monday, January 01, 2007

The Cohan Letter up 15% in 2006

After trailing the S&P 500 index for most of 2006, the stocks mentioned in The Cohan Letter, my investment newsletter, managed to surpass the index by 1% by the end of the year – ending up an average of 15%.

In thinking over the performance of the stocks mentioned this year, I was struck by how difficult it was to find stocks that did well. Thus the 2% stop loss rule which I’ve been using for the last several years played a very big role in cutting losers before they could do much damage.

Compared to 2005, four more stocks fell at least 2% this year from the price at which they were mentioned. Specifically in 2006, 22 out of 36 stocks fell at least 2% below the price at which they were mentioned compared to 18 stocks cut in 2005.

These figures suggest that most of my stock picks are lousy. In 2005, when the stock picks were up 23.2% compared to 3% for the S&P 500, fully 50% of the stocks I mentioned proved to be money losers while in 2006, 61% dropped at least 2%.

This analysis suggests that a big part of investing success is following a strict discipline for selling losing stocks before they can do much damage.

But merely not losing is not enough to win in the investment game. Finding stocks that go up more than the market averages is also important. And this year, of the 14 stocks that were left in the portfolio at the end of December, six outperformed the S&P 500, one equaled it, and seven under-performed the index.

I found it interesting that the two top performing stocks in the portfolio were both Mexican companies whose stock prices surged in December. Specifically, Telefonos de Mexico, S.A. (ADR) (NYSE: TMX) was up 36% from $20.83 to $28.26 and Wal-Mart de Mexico (ADR) (OTC: WMMVY) rose 28% from $34.25 to $43.85. At the end of November, these two stocks were up a relatively paltry 25% and 10% respectively.

I am not sure why these stocks climbed so much in December but one reason may be window dressing – the decision by portfolio managers to acquire shares in top performing companies at the end of the year so they can show their investors that they owned these top performers.

This strategy strikes me as silly since investors should be able to tell that their portfolio managers did not hold these winning stocks long enough to capture the high returns that the winning stocks demonstrated during the year.

Nevertheless, this predictable pattern suggests there’s money to be made by traders who can anticipate – maybe in late November – which stocks will be the biggest volume window trimmings for portfolio managers towards the end of December.

4 Comments:

Blogger Larry said...

Circuit City layoffs set a scary precedent for workers
Posted Mar 29th 2007 2:45PM by Peter Cohan


In an article posted on bloggingstocks Peter Cohan reports that
“Circuit City Stores Inc. is replacing its experienced workers with cheaper models”. He then goes on to ask “What does Circuit City's replacing of its retail workers mean for workers and their salaries across the board”?

He continues by spelling out “The plan” which consisted of “Circuit City's decision to fire 3,400 of its highest-paid sales staff and replace them with lower-paid workers is a risky strategy to cut costs that goes beyond the traditional layoffs, buyouts and hiring freezes used by struggling companies”.

“I think this is a risky move because the quality of service to customers will almost certainly decline since the higher paid people who were fired will take with them product expertise that consumers found helpful. Circuit City is gambling that the sales it loses as a result of the less experienced staff will be more than offset by the lower pay the new rookies receive”.

The interesting question that Peter Cohan raises is how does a business decide between whether to trade on price or service?
Most companies, when asked, will tell you that they offer both the “Lowest price” as well as the “Highest level of service”. Privately, they will admit to each other that often there are choices and trade offs that need to be made. Ultimately the best companies and the smartest consumers search for “VALUE”.
“Value” is inherently about compromise and is therefore quite subjective. The Ferrari Enzo with the ability to reach 0-62 mph in just 3.65 seconds and a top speed of 225 mph, no one could deny that it is a first class sports car, but with a million dollar price tag one could claim that it is not a great value. In a service business the compromise comes in the form the amount of knowledge, Experience and Time (KET) that representatives can offer the customer. The greater the amount of KET the greater cost to the company.
In these days of the Internet and price search engines it is easier than ever to search based on price, but increasingly more difficult to shop based on value.

At Urban Insurance Agency, we have always worked hard to provide the highest quality of service why still maintaining very competitive prices. We have employees that have been with Urban Auto for more than 10, 20, 30 even 45+ years. We do not have any seven figure employees, or marble floors. We have selected to place our offices in convenient, yet lower rent locations, all in an effort to keep our costs as low as possible without sacrificing the quality of our customer service. Often people only care about price, until they have a problem; at Urban Insurance Agency we refuse to “Farm-out” our customer service to a third-party call center, or outsource service to India. It can be a more difficult sell, but It is my belief that people will return to those companies that “Solve their problems,” that requires a knowledgeable staff that are empowered to make decisions.

2. UrbanBlog http://urbaninsuranceagency.com/blog.php

My personal experiences with Circuit City has left me with the impression that few of the employees there have more than just a superficial level of knowledge about the electronics the store sells. The idea that circuit city is going to eliminate the only employees that “Have a clue,” strikes me as a self-defeating proposition.
In this age of HD, where today’s cutting-edge technology will be hopelessly obsolete in 2 years, consumers are looking for information. They want companies that can solve problems


I buy all of my Home Audio and HD equipment for a small independent guy. He does not stock much, but he will order what ever you want and at a price at times lower than Circuit City or Best Buy. The important thing is he knows how to take the equipment apart and put it back together. When I came into buy a new DVD player, he remembered which HD TV I had in which room hooked up to which receiver; so he gave me the correct inter connects.

More and more, Circuit City is becoming a display case for small shops to send customers to look and compare, then come back to them to buy. The reason for that is because many consumers just have little confidence in the information or advice they get at these “Big-Box Stores.” Therefore they can only sell on price and the margins are too small to be profitable.

I understand why they feel compelled to cut costs, but by getting rid of their most skilled employees and replacing them with minimum wage clerks is just going to guarantee the company’s downward slide. There is a reason new car dealers don’t replace their sales people with $7.00/ hour people. It is my belief that people will return to those companies that “Solve their problems,” answer their questions, that requires a knowledgeable staff that are empowered to make decisions not minimum wage untrained workers.

Circuit City’s days are numbered.

http://www.urbaninsuranceagency.com/blog2.php/
Larry Lubell
UrbanBlog
Posted at 6:08PM on Mar 29th 2007 by Larry Lubell

9:13 AM  
Blogger midas784 said...

Cohan, you are an idiot who predicted Blackstone (BX) to hit $90 on first day. Where did you do your management from, huh ? Or maybe your degree should be revoked. Do you have any sense at all ?

I and many others w/o management degree had better insight and sense to evaluate the company better. What were you thinking ?

Here is my initial analysis before BX IPOed:
----------------------------
BX is hurrying its IPO not knowing what could happen to the market next week... Another bubble which will really hurt the market...

Jim Jubak: Blackstone IPO Is a Must-Miss
http://www.thestreet.com/pf/newsanalysis/investing/10348377.html

Why FIG was a bad IPO (must read):
http://www.thestreet.com/_yahoo/funds/investing/10341308.html?cm_ven=YAHOO

Both FIG and BX knows that they are at the top of the private equity cycle. Cannot get any better and will only get worst as debt (required to take companies private) is not cheap anymore and becoming more expensive to leverage as interest rates are rising.

Also most of you should know that BX is not selling their attractive funds/equity portions of the business. They are selling a small portion of the company which manages these funds/equity. And this company will have a market cap of $40 billion. Imagine if BX was bringing to public their core business, what would its market cap be...?

But do keep companies like these in your super-short lists: BX, FIG, INFN, CAVM, ATV, LLNW, NMX, ENOC, ARUN. Will def. come in handy when the bubble bursts again.
--------------------------

And this is response to someone on ipohome.com who is as much as a nut you are who predicts BX hitting 121 a share:

> This one I feel atleast has the
> potential to double. Im on a limb > once again... this one will see
> 121 a share.....within 4 months
> sponge

At $121, it will be close to $140billion market cap, almost twice as big as Goldman Sachs. And that too, only the management arm of Blackstone. So what would you value the entire Blackstone group. You are a plain idiot who may have got lucky with MA and now enticing others to buy at current levels to help your cause.

If you say double from here, even at $75, it will be nearly as big as GS which had $69 Billion in 2006 revenues and nearly 10billion in profits - GS profit alone is more than BX revenues. And BX revenues are only going to get worst with interest rates rising and the new BlackStone Tax law which the two senators are fighting about with the SEC.

And finally MA trading at $166 with a astronomical PE of 160+ looks cheap in front of BX even though it is small revenue wise. But it has a stable consumer oriented business and one of the only 3 leading credit card companies. BTW, I am short on MA.

------------------------------------

12:16 PM  
Blogger Joseph said...

I read your comments i.e. housing on AOL. Your comments about not buying are too general and not market specific. Being in the Boston MSA do you really believe that this housing market is similar to say...Miami? Boston is cheap and when you can buy way below replacement, in a restrictive market like Boston, and you NEED housing - BUY. Stick to stocks, I think your more on target.

Joseph Pelich
Real Estate Developer
North Andover, Massachusetts

12:46 PM  
Blogger Sharlotte said...

I found your blog very interesting. You are talking here about Circuit City. I have found out everything about the company from http://www.pissedconsumer.com. Besides, I read consumer reports on the products and services of the company. I must say – very few positive reviews. Most people are not satisfied with the Circuit City, however it is one of the largest consumer electronics retailers in the United States.

1:00 AM  

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