The Best and Worst Stocks in my Peter Lynch portfolio from 2017

This year, like every year, was a year in which I made some good decisions… and some bad ones. No investor ever goes without taking some hits to their pride. I’m no exception. I’ll start with three of my worst decisions.

The Worst of 2017

Neulion (TSE: NLN)

I lost 50% of my investment in this company in 6 months. That’s when I decided to cut my losses. I’m glad I did because the stock has continued its decline.

The reason I bought this company was because I felt it was in a position to ride the trend in delivering video content over the internet. Specifically, it helps organizations deliver live sports via the internet. The Mayweather-McGregor fight is an example of Neulion’s services.

I still believe that there is a gap in how sports leagues around the world are leveraging the internet to deliver content to fans. A prime example is ESPN. With headlines like, Please Put ESPN Out of its Misery, it’s hard to defend its leadership.

Netflix wrote the blueprint in delivering video content to paying subscribers via the internet. Amazon is following suit. The question now is how, and when, will sports leagues like the NFL, NBA, NHL, MLB start the transition.

This is one of the investment themes I’m following for 2018. My portfolio has added a few new names in anticipation of live sports moving to the internet as its primary source for delivery.

Freshii (TSE:FRII)

This is a case where I bought the stock too soon. A newcomer to the fast-casual restaurant landscape, Freshii has a healthy food menu. It’s a trend I’m following and personally value. I’ve eaten here in the past and continue to do so. That’s what got me interested in the first place.

The problem was I fell in love with this company before it had proven itself. It had rapid expansion plans which have not worked out as expected. It’s Q3 2017 results damned the company and its stock was punished accordingly. At one point I was down over 70% in my initial investment.

Since then Freshii’s stock has recovered somewhat but its management’s reputation has been damaged. Wisely, it’s decided to moderate its growth expectations by scaling back the aggressive number of new store openings.

Regardless of the reduced optimism around the stock, I still hold my shares. It’s early days for Freshii and I’m a believer in the overall trend towards healthy eating. My portfolio contains several companies that are positioning themselves to serve health conscious consumers.

Chipotle Mexican Grill (NYSE: CMG)

I’m a big believer in the Turnaround stock thesis. Peter Lynch was right about these stocks being a good place to find bargains. My portfolio owes much of its success to the Turnaround stock. That’s why I invested in Chipotle Mexican Grill.

As many of you know already know, Chipotle had some issues with food poisoning at its restaurants back in 2015. Like its customers lunches, the hugely popular restaurant saw its stock flushed down the toilet.  

When bad things happen to a good company, I keep an eye on the stock and prepare for an eventual return to form. This is why at the beginning of 2017, I purchased shares in Chipotle. The worst looked like it was behind them.

I wasn’t alone in that assessment and at one point I was up 30%. However, guidance from the company in Q2 moderated expectations. Customers weren’t coming back as quickly as hoped. The stock retreated to $400 at which point I sold for a small loss.

I’m still a believer in the Turnaround stock but for the time being, Chipotle challenges that investment thesis.

The Best of 2017

Activision (NASDAQ: ATVI)

This has been one of my best performing stocks for the last 2 years. In 2017, Activision is up over 80%. In the two years combined, it’s a 160% increase.

I started looking at this stock in 2013 when it had been written off by Wall Street. They were certain mobile gaming would see the end of platform gaming. In 2013, you could’ve bought Activision when it was trading for roughly $15/share and a P/E of 7.

Now, Activision is trading at $65/share and has a P/E in the 40’s. Expectations are high for this stock but not out of reach. It’s titles are extremely popular. Overwatch continues to grow legions of fans with each release. As well, legacy franchises like Call of Duty continue to provide revenue from loyal customers.

In general, I’m a fan of the video game space and will continue to add gaming companies to my portfolio.

Alibaba (NYSE: BABA)

The first time I came to acquire Alibaba stock was through a classic Peter Lynch Value Play. In 2013, I started buying shares of the most-hated stock in Silicon Valley… Yahoo!

Back then, a few people recognized you could buy into the extraordinary growth of Alibaba by purchasing shares of the “worthless” Yahoo. Jerry Yang, the former CEO of Yahoo, bought a stake in Alibaba in its infancy. Long after Yang was gone, that stake had grown large but wasn’t clearly reflected in Yahoo’s balance sheet or stock.

That trade netted me well over a 100% gain. I sold my shares in Yahoo and Alibaba in 2014. However, I bought back into Alibaba this year a couple of times. So far it’s up 96% in 2017.

Compared to its rival Amazon, it’s a bargain. Amazon has a P/E of 300. Alibaba is at 48. I like both companies but Alibaba is cheaper.

China Yuchai Ltd (NYSE: CYD)

This small-cap company makes diesel engines for Asian markets. It’s not an exciting business and barely gets any coverage. I bought it because it’s a Value play.

This company has roughly $11/share in cash sitting on its balance sheet. It’s trading at $24/share so with the cash you’re buying shares at $13. That’s a pretty decent discount.

Outside of the cash position, this company is cyclical in nature. As economies in Asia make gains, China Yuchai benefits by selling its industrial engines. So far this year, I’m up 29% with China Yuchai Ltd.

Onwards to 2018

Overall 2017 has been a good year. The value of the stock market has increased making it harder to find bargains.

If you’re interested in leveraging the research I do to find stocks for your portfolio, sign up my DIY Peter Lynch portfolio.

It lists stocks according to Lynch’s six categories. It’s easy to use and gives simple Buy, Sell and Hold recommendations so you know when to buy and when to sell.

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Net Ease surprises on Earnings

Net Ease has a PEG Ratio of 0.6085 making this Chinese video game maker an affordable growth company.

I like video game space in general. I’ve been a holder of Activision (ATVI:NASDAQ) for three years and in that time it’s appreciated over 300%.

I bought it when everyone was saying traditional video game makers were going to lose out to mobile games. Glad I ignored everyone’s negative sentiment and bought it.

I feel the same with Net Ease (NTES:NSDAQ). This company has a lot of negative sentiment around it. It’s got good titles that people are buying. I’m a long term investor so I don’t mind the negative sentiment.

 

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High Earnings Yield benefits long-term investors

I found this great video interview with value investor Joel Greenblatt. I agree with his assessment on pretty much everything in this video. Greenblatt says, “High earnings yield now, means there are low expectations for the future. Those are precisely the stocks that institutional managers, who are worried about doing well in the next year or two, systematically avoid.”

I’ve definitely come around to this assessment. Open Text (OTEX:TSE) (OTEX:NASDAQ) is a recent example of high earnings yield.

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Stamps.com (Nasdaq:STMP)

Why didn’t I buy this stock 2 years ago when it came onto radar. I have a screener that looks for companies that are growing and show some value… as is the way with Peter Lynch’s PEG ratio.

Also, Stamps.com (NASDAQ:STMP) made my watch list because it made a lot of sense to me. There is a trend in individuals who are selling their products online through sites like ETSY. This company helps those people by making allowing them to print postage from their homes and home offices. I know people who actually use Stamps.com and are highly successful business owners.

As Peter Lynch would say, your own experience counts as valuable research that Wall Street professionals don’t have. I missed out on buying this stock two years ago but I might still buy in at this price. I’ll have to do a little research first.

 

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