Stocks Of The Month: The Distressed 2011

In preparation for this year's additions, several stocks had to be purged from the portfolio. Borders (BGP), China Real Estate Information Corporation (CRIC), Energy Conversion Devices (ENER), E*Trade (ETFC), and GigaMedia (GIGM) were all underperformers with poor fundamentals - they won't be missed. Also, I took profits in American International Group (AIG) after a pullback/correction.

With MetroPCS (PCS) being the lone survivor of a particularly horrible batch of picks from last year, I seeked higher-quality candidates this time around. No .OB's or .PK's. No eminent bankruptcies. No poisoned balance sheets. Just some solid yet under-appreciated stocks, primed for a bounceback.

Without further ado, I present to you the 2011 edition of "The Distressed":

Electronic Arts (ERTS, -74% from Mar. 2005): game software maker figures to turn around at some point...or get bought out.

ITT Educational Services (ESI, -51% from Feb. 2009): outstanding profitability and margins.

La-Z-Boy (LZB, -74% from Apr. 2002): furniture business in a long slump.

China Nepstar Chain Drugstore (NPD, -81% from Nov. 2007): small ($414M market cap), risky but profitable, yields 6.4%.

White River Capital (RVR, -32% from Feb. 2007): smaller ($64M market cap), thinly traded, yields 5.9%. Subprime(!) auto financier.

Skechers (SKX, -48% from Jun. 2010): footwear maker subject to the most fickle of consumers.

STEC (STEC, -45% from Sep. 2009): data storage is a crowded area, but this could be the next SanDisk.

Here's my current portfolio. As always, I believe in all of these stocks - until I sell them.

Apple (AAPL) 12.31%

Southern Copper (SCCO) 10.61%

Dominion Resources Black Warrior Trust (DOM) 7.16%

Google (GOOG) 6.82%

Ace Limited (ACE) 4.35%

Baidu (BIDU) 4.34%

The Distressed (C, ERTS, ESI, F, JSDA, LZB, MMI, MSI, NPD, PCS, RVR, SKX, STEC, WFC) 4.18%

Apache (APA) 4.07%

Annaly Capital Management (NLY) 3.56%

Hugoton Royalty Trust (HGT) 3.54%

BP Prudhoe Bay Royalty Trust (BPT) 3.48%

Blackstone (BX) 3.13%

American Software (AMSWA) 3.11%

Prospect Capital (PSEC) 3.00%

Cherokee (CHKE) 2.96%

Frontline (FRO) 2.96%

Vodafone (VOD) 2.71%

Great Northern Iron (GNI) 2.68%

DuPont (DD) 2.62%

Intel (INTC) 2.45%

F5 Networks (FFIV) 2.34%

BreitBurn (BBEP) 2.31%

McDonald's (MCD) 2.26%

Intuitive Surgical (ISRG) 1.58%

Cree (CREE) 1.07%

My Current Investing Philosophy

It's been a few years since I've attempted to state my investing philosophy, which has always been a work in progress/moving target/school of hard knocks type of strategy; my portfolio is what it is at any given moment. It's definitely not my intention to do things on the fly, but the market always has new lessons to learn around every corner.

Excuses aside...my intentions are to own stocks that:

• are long-term, "buy-and-hold" investments;
• represent great underlying companies and/or valuable assets;
• have excellence across as many metrics as possible;
• are cheap by valuation; and
• pay outstanding, stable, well-funded dividends, or
• promise extraordinary growth.

Conversely, my intentions are to avoid stocks that:

• are short-term, "day trader" investments;
• represent minimal value beyond their stock symbol;
• have poor metrics by any measure;
• are expensive by valuation; and
• pay no or low, unstable, or underfunded dividends, or
• promise low or no growth.

Seems fairly simple, doesn't it? And yet, I've bought more lousy stocks, and lost more money owning those lousy stocks, than any so-called investor ever should.

February is traditionally my "distressed" month, when I choose a basket of downtrodden stocks in hopes of some of them bouncing back. The ones that do rebound - for example, Ford (F), Blackstone (BX), and Jones Soda (JSDA) - seem obvious in retrospect; the ones that fail seem obvious as well. I think these "distressed" stock results exemplify (in an amplified way) what my investment philosophy should be. Fundamentals always win; fundamentals always matter.

Starting this month, I will attempt to clear the deck of any past failures (as noted before, I do own too many stocks), and use some additional discretion in the stocks I buy and own.