One of our annual traditions in this crazy financial sphere of the internet is to compete in a so-called ‘fantasy investing league’ with few of our favorite writers (and commenters!), run by our friend Nelson at Financial Uproar. The rules are simple:
- Pick anything Nelson can track easily with Google Finance.
- The ‘start price’ is the open on the first trading day of the year.
- The ‘end price’ is the close on the last trading day of the year.
- If a ticker is bought or stops trading, you get the price of the last trade.
- Dividends don’t reinvest, but cash is added at the end of the year for results.
- (New for 2015!) What Nelson is calling the “Don’t Quit Your Day Job Rule” – you can only buy tickers which are derivatives of stocks. (He didn’t like my short volatility picks from last year).
Since it matters to people who follow the site, before my picks I need a short disclaimer: I currently own none of these stocks… but because I played it straight this year, I picked these stocks using my normal criteria and screens. I may purchase them in the next 30 days.
Additionally, I pick on various value criteria… so inherent in that statement is the implication that success would be long term. Long – as in more than 365 days – long. Yes, that probably means value picks probably aren’t the best choice for a one year contest, but old dogs, new tricks something something. Also, it’s a contest, so I don’t have real money on the line here – so CACC’s and TRN’s (in particular) regulatory uncertainty isn’t something I’ve really explored in depth yet.
Okay 250 word preamble aside, let’s get into the picks!
The Theory of a Market Overreaction to Falling Oil Prices
Three stocks based on this theme, yet all of them a slight variation on the theme. Remember, we also saw sub-$50 a barrel oil in 2008 and 2005 – in fact, we built a calculator so you can calculate the ‘return’ on oil from any arbitrary dates.
- VLO – Valero Energy.
I’m sure you’ve hear of Valero, but for the uninitiated – it’s a large petroleum refiner. They’ve also existed since 1955 – so there’s some qualitative proof they can exist in various oil price climates.
And for quantitative? A P/E under 7 (okay, maybe justified), a 1.2 Price to Book, 7.9% Return on Assets, 19.4% Return on Equity, 14.54% Return on Invested Capital, and a beautiful 3.59 Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization. I’d say it qualifies as a good pick from the refiner space…
- TRN – Trinity Industries Inc.
Trinity is a manufacturer of railroad, marine and other various form of transportation products, infrastructure devices, and safety devices. As alluded to in our introduction, they are currently under a bit of legal and regulatory scrutiny due to questions about a highway guardrail product. We don’t know enough to fully interpret the implications of that, but Trinity is a quantitatively strong company.And the energy play?
As Trinity makes rail cars and equipment, rail is noted to be one of the industries hurt by lower oil – since it makes other forms of transportation cheaper in comparison. If you also like that hypothesis over the long term, rail is an interesting place to explore.So take all that in, but also look at the fundamentals – P/B 1.5, P/E 6.4, ROE 25.3%, ROA 8.3% and ROIC 13.21%. If your mouth isn’t watering yet, EV/EBITDA is sitting at around 5.40.
- MEOH – Methanex Corporation.
Methanex is a producer of methanol – you know, that cousin of consumable alcohol (ethanol) which works great in anti-freeze, and has the ability to blind you if you consume it*. For our purposes, Methanol is also a precursor in many chemical reactions necessary to make other chemicals, as well as a pure fuel or, (more often) a fuel additive (for example, in many blends of gasoline). Now you see why it’s in the energy category?
Anyway, P/E of 10.1, P/B is a little weaker than others on this list at 2.5, as is EV/EBITDA at 6.33. However, ROA/ROE/ROIC of 11.40%/27.84%/17.40% respectively means they’re doing something very right.
* (Fun fact – methanol overdose – and ethylene glycol overdose – is treated with ethanol, as it outcompetes the two other alcohols for breakdown in the body by the enzyme ADH. So your liquor cabinet could save a life someday… don’t drink anti-freeze!).
- CACC – Credit Acceptance Corp.
Here’s a pure auto finance play, one which long time readers will remember we picked in 2013’s version of this contest. You can find our writeup there, but also note (again, as noted in the introduction), that CACC has a bit of regulatory and legal uncertainty attached due to sub-prime auto lending.Noting that the market usually overreacts to legal uncertainty, we took a look at the fundamentals – again, for the second time since 2013.
As it’s a finance firm, our normal round of measures won’t work (PDF warning, but great read) – but we can find a 36.03% ROE and 10.15% ROA and be happy regardless. The 12 month trailing P/E was around 12, which is a little high for our liking – but, hey, we didn’t go all energy for this contest!
2015 Stock Picking Contest
So, there you have it – those are the horses we’ve got in 2015, picked with a value mindset which generally aims to do well over an even longer term. Keep that in mind before you use your real money to buy these stocks we bought with fake contest money… and note again that I might purchase some of these stocks in the near future, I don’t own any (with real money) as of this publication.
So, do you like our picks? Is energy a widow-maker this year? Would you not touch companies with regulatory or legal uncertainty? What companies do you think will perform strongest in 2015?