Tuesday, February 20, 2018

Dogs versus Darlings conclusion 4 years later

It is time to draw a close to this amusing exercise, started here with interim follow up here.

The result after nearly 4 years- the Dogs portfolio is up 40% (without accounting for dividends which would have added at least another 10-15%).  The Darlings portfolio broke even (without accounting for dividends, probably adding 10%).

The Dogs are COF, NWH, MND and LYL. In March 2014 and for a subsequent 2 years until the depth of the mining services crush in early 2016, these names were persona non grata in nearly every portfolio manager's book. Within my circle of friend's and colleagues, only one other investor shared my enthusiasm for these Dogs, and actually invested some money in them.

To recap, the Darlings are OFX, XRO, IPP and REA. They collectively underperformed not just the Dogs, but also the All Ordinaries Accumulation Index. It was also quite fortunate for the Darlings portfolio that IPP was taken over by REA (and subsequently written off to zero), and that REA got included instead of the original candidate FLN. Furthermore, I would also argue that the Dogs performance was crimped because of COF's takeover. Subsequent to the takeover, COF's financial performance improved many fold, and I am quite confident that the share price would have appreciated significantly more than the 62% premium gained on the takeover.

It is also worthy to note that the Dogs achieved this outperformance against the Darlings in a raging bull market, especially for technology stocks.

Some may say that 4 years is too early to tell, and that the Darlings will prove their worth over the long haul, say 5 to 10 years. So let's just check periodically.

The lesson here is that valuation matters and variant perception matters. Just speak to any investors who bought Microsoft and Cisco during the heights of the dotcom era in 2000.

To hammer the lesson home, we have a roster of another 4 darlings- PME, ALU, APX, and WTC. I am preparing a roster of Dogs. Stay tuned.

Yours One Legged


galumay said...

Will be interesting to see your new dogs! I bought 2 of the previous list, MND & NWH, out of MND now, but stayed in NWH, averaged all the way down (i got in too early at about $1) and rode it all the way back up.

By happy coincidence I held none of the darlings, and I hold none of your current darlings.

As always an interesting post!

Anonymous said...

Please through in some of the listed patent lawyers on the dog's list they have all been hammered recently. Also, there has to be a retail name in there given the Amazon derating amongst other this the whole sector has been hit with. Maybe MYR.

Peter Phan said...

Thank you folks for your comments.

NWH was such a remarkable Lazarus like story. From the lows of 4 cents, it is now a 40 bagger after only 2 years.

Also thank you for the suggestions on the patent lawyers and MYR. I do not like any of the patent lawyers as I do not believe they is a moat for these sort of businesses, and the valuation is just not compelling enough. With MYR, I have not looked at it for a while, but I would figure that the off-balance-sheet lease liabilities would be a major headache. Again not compelling enough.

I already have my Dogs, and I will try to post as soon as I can.