Crafty portfolio designs and names have come and gone over the years. Some have been good and some have been bad. The newest that we reviewed from a new Stifel research report,appears to have derived the name from the 1989 cult movie hit “Bill and Ted’s Excellent Adventure.” While the name may be amusing, the idea behind the portfolio makes good sense, and the support data seems to indicate that it may be just the ticket for investors with a three-year time horizon.
The Stifel thesis for favoring stocks of “Un-Excellent” over “Excellent” companies is easily defended, since high returns, which represent the hot, or top companies in the Excellent portfolios invite new entrants that drive can down profitability, while poor returns not explained by industry-cyclical behavior may cause competitors to exit, lead to management changes or acquisition by financial or strategic buyers even after accounting for bankruptcy/severe financial distress.
The bottom line is that the Un-Excellent portfolio is a contrarian play on stocks and sectors that is given a three-year span to play out. The Stifel supporting data proves that it works.
We picked one stock from each sector in the Un-Excellent portfolio to give readers an idea of the names that Stifel thinks will work in this format.
Alcoa Inc. (NYSE: AA) stock took off last October from a long-term sideways base and is up almost 50%. Since being booted from the Dow Jones Industrial Average, it has had the last laugh as its stock price has climbed considerably in a relatively short time. A lot of optimism is built into Alcoa’s rally, based on firming aluminum prices and the prospect of a steady global economic recovery. Investors are paid a 0.8% dividend. The Thomson/First Call price target for the stock is $13.11. Alcoa has blown past that and closed Wednesday at $14.64 a share.
Anadarko Petroleum Corp. (NYSE: APC) is one of the biggest independent oil and gas producers in the country, with exploration or production work in all major domestic drilling areas, as well as in South America, Africa, Asia and New Zealand. Worldwide, natural gas makes up just over half of Anadarko’s reserves, but 87% of the new wells it drilled in the United States last year were gas wells. The company has daily production over 2.6 billion cubic feet. Investors are paid a 1% dividend. The consensus price target is $117.23. Anadarko closed Wednesday at $109.58.