Stocks? Pt. 2

As it turns out, buying the “unloved” stock examples Blackberry and Netflix would have dramatically outperformed the Morningstar stock portfolio of 20 undervalued stocks through the first quarter, as the portfolio returned only 1.4%.  Note the S&P 500 was up 7.4%, and our unloved examples of BBRY and NFLX (very risky/volatile) would have been up 60%.

Although the Morningstar value portfolio did well with a few picks such as Berkshire Hathaway and Excelon (+15%), it also had poor picks like Weight Watchers (-23%) that weighed down the portfolio.  The performance difference between the hand-picked stock examples and Morningstar’s portfolio of undervalued wide-moat stocks is largely due to earnings and product announcements from BBRY and NFLX, as well as somewhat broader interest in these names than in most companies in the Morningstar portfolio.

Many of the Morningstar portfolio stocks remind me of another holding I have – China Gueri (CHOP), a Chinese specialty metal producer that is tremendously overvalued but isn’t on many people’s radar.  The price of a stock is based both on the free cash flow of the underlying company and on market sentiment, and it seems market sentiment may change with less-known stocks relatively slowly.

I’m not inclined to rebalance the Morningstar portfolio given the few changes and poor performance through the first quarter, but will revisit its performance in coming quarters.