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The Winners and Losers of the Heard's Stock-Picking Event

<br /> The Winners and Losers of the Heard’s Summertime Stock-Picking Event – WSJ<br />

The Journal used to throw darts at the stock tables, which turned out better than when its columnists tried to find great stocks

It has been 15 years since The Wall Street Journal ended a long-running experiment to prove that the stock market is efficient. The test was inspired by a line in Burton Malkiel’s investing classic “A Random Walk Down Wall Street,” that monkeys throwing darts at newspaper stock tables could pick stocks just as well as the experts.

For practical reasons such as costs and legal liability, we used journalists instead of monkeys to throw the darts. Maybe that was a mistake—the journalists somehow lagged behind the market by about 2 percentage points. The fund managers beat both handily, though Mr. Malkiel and others surmised that the publicity generated by the pros’ picks may have given them an unfair edge.

Back then, pro stock pickers were superstars. Today there is broad skepticism that anyone can consistently beat the market. With investors piling into index funds, the 14 columnists who write for Heard on the Street across the globe tried a different experiment—trying to see if we could upset conventional wisdom and beat the market. More analytical, quantitative and opinionated than the rest of the newsroom, we picked or panned 23 stocks, indexes or currencies over the course of the summer and resolved to track their performance for all the world to see.

119%

Capcom

Ambarella

119%

U.S. Steel

87%

Costco

86%

71%

Airbus

44%

Garmin

Invesco

39%

38%

Cigna

Samsung-SDI

31%

Suncor

17%

Spanish stocks (IBEX)

–2%

–17%

BNP-Paribas

–29%

Merck

–35%

WPP

Baker-Hughes

–55%

Sell

Annualized return since pick

Stock

Chipotle

–19%

–6%

Swiss Franc

Yanzhou Coal

–5%

16%

Nestle

19%

China Merchants Bank

67%

Credit Acceptance

85%

U.S. Home Constr ETF

226%

Restoration Hardware (RH)

Pick was:

correct

incorrect

Buy

Stock

Annualized return since pick

119%

Capcom

119%

Ambarella

87%

U.S. Steel

Costco

86%

Airbus

71%

44%

Garmin

39%

Invesco

Cigna

38%

31%

Samsung-SDI

17%

Suncor

–2%

Spanish stocks (IBEX)

–17%

BNP-Paribas

–29%

Merck

–35%

WPP

Baker-Hughes

–55%

Sell

Stock

Annualized return since pick

Chipotle

–19%

Swiss Franc

–6%

–5%

Yanzhou Coal

16%

Nestle

19%

China Merchants Bank

Credit Acceptance

67%

U.S. Home Constr ETF

85%

226%

Restoration Hardware (RH)

correct

Pick was:

incorrect

Buy

Stock

Annualized return since pick

Capcom

119%

Ambarella

119%

87%

U.S. Steel

Costco

86%

Airbus

71%

44%

Garmin

39%

Invesco

38%

Cigna

31%

Samsung-SDI

17%

Suncor

–2%

Spanish stocks (IBEX)

–17%

BNP-Paribas

Merck

–29%

–35%

WPP

Baker-Hughes

–55%

Sell

Annualized return since pick

Stock

Chipotle

–19%

–6%

Swiss Franc

Yanzhou Coal

–5%

16%

Nestle

China Merchants Bank

19%

Credit Acceptance

67%

U.S. Home Constr ETF

85%

Restoration Hardware (RH)

226%

incorrect

Pick was:

correct

Buy

Annualized return

Stock

Capcom

119%

Ambarella

119%

U.S. Steel

87%

Costco

86%

71%

Airbus

44%

Garmin

Invesco

39%

38%

Cigna

Samsung-SDI

31%

17%

Suncor

–2%

Spanish stocks (IBEX)

BNP-Paribas

–17%

Merck

–29%

WPP

–35%

–55%

Baker-Hughes

Sell

Stock

Annualized return

Chipotle

–19%

–6%

Swiss Franc

–5%

Yanzhou Coal

Nestle

16%

China Merchants Bank

19%

Credit Acceptance

67%

U.S. Home Constr ETF

85%

Restoration Hardware (RH)

226%

The contest ended Dec. 15, and since the picks were made on different days, we annualized the gains. The results were humbling. The 5.8% annualized gain wasn’t awful—it just looks poor against the S&P 500’s roaring 26% annualized gain. One difference between an actual fund manager and a journalist who pretends to be one is that only pride is lost, not other people’s money. Another is that we are a reflective bunch and actually want to revisit what went wrong, and what went right, with our picks.

One reason for the lagging performance is the columnists were allowed to make buy, or sell, recommendations on assets. Being naturally skeptical journalists, eight of the 23 picks were “shorts.” Only three of those had a positive total return. The average return of the shorts was a nauseating negative 47.7%. Fighting the market is tough at any time but especially when markets seem to set record highs nearly every day. The three worst picks were all shorts and the nine top picks were all longs.

While the shorts had to fight a rising market, the buy recommendations performed great. The average annualized return of the Heard’s longs was an impressive 34.3%, handily outpacing almost any asset class other than cryptocurrencies like Bitcoin.

The two top picks with annualized returns of 119% were Japanese gaming company Capcom and U.S. chip maker Ambarella. Their success isn’t surprising given the boom in tech stocks this year. But the third place name, faded blue chip U.S. Steel, was a surprise and more surprising still because the pick was based not on U.S. demand, but on China cutting supply.

Capcom, the maker of the Street Fighter games, delivered a knockout blow with strong results in November. Optimism is growing that shifting its emphasis into the red-hot world of mobile gaming can help it catch up with more successful Japanese and non-Japanese rivals. Capcom was a relative bargain in the world of videogame companies and remains so after its 32.3% gain during the contest.

Ambarella, which just missed the contest’s top spot, had seen its share of spill and thrills through a boom and bust supplying both action camera maker GoPro and drone manufacturers. Its shares had slumped to a 16-month low following a disappointing earnings report in late August. But Ambarella’s new focus on sensor chips used in self-driving cars wasn’t yet appreciated by investors. That business bolstered results released in November, and Wall Street is taking notice. The company is expected to showcase its automated driving technology at the Consumer Electronics Show next month.

Sticking to the theme of a beaten-down stock, the third best pick, U.S. Steel, was absolutely unloved and hugely volatile to boot. But, at the time of Heard’s write-up, it was down by 24% year to date despite having posted its best margin since 2008. The crux of the bet wasn’t just that the gloom was overdone, though. It reasoned that China, the world’s largest steel producer by far, would start to address its overcapacity. Steel prices in China already had risen to their 2011 level, around the time of its last big infrastructure boom.

While it is always nice to take a victory lap, picks lasting 3½ months on average can’t succeed merely on solid arguments—they also require good timing and no small amount of luck to work out. The same, sadly, was true on the other side of the ledger where some sound analysis collided with harsh market reality.

Which brings us to RH, formerly known as Restoration Hardware. Our sell call was the team’s worst-performing pick by far, with the shares up 226% annualized (78% during the event). The furniture retailer already had confounded short sellers skeptical about its business prospects by buying back 48% of its own shares outstanding over a period of just five months. The stock tripled, enriching some insiders. That shopping spree didn’t come cheaply, though. The company borrowed more than half the amount it spent, pushing its debt to a worryingly-high 7.6 times earnings before interest, tax, depreciation and amortization. The stock fell nearly 20%, but the short-covering resumed with gusto after the company beat earnings forecasts and raised guidance in early September, shortly after the Heard’s pan of the stock.

The same excuses can’t be made for the Heard’s second worst pick, a short call on home builders. A broad industry index tracked by S&P Dow Jones Indices already had risen three times as much as the overall stock market year-to-date on the perception that tax cuts would benefit the sector greatly and that they were cheap on book value. Yet the industry faced rising labor and materials costs and was more expensive on valuation. But the passage of tax cuts with better-than-expected treatment of mortgages let home builders dodge a bullet for now.

Betting against any sector or stock in this raging bull market was tough, but a rare bright spot came courtesy of Chipotle, which fell 19% following our short call. The stock already was well off its highs after several incidents that sickened customers and it earned an investment from outspoken hedge-fund manager

William Ackman.

Heard argued that the beleaguered fast food chain still was priced for unrealistically rapid growth and a complete return of trust from its customers.

Guilt-by-association can be a problem, too. Take Baker-Hughes, a GE Company, which was our worst buy recommendation. The company remains 62.5% owned by General Electric, and the conglomerate’s shocking dividend cut and stock plunge in the fall had a spillover effect on the unit, perhaps in part because its need for cash might mean that the shares could be sold, contrary to management assurances, creating an overhang. Despite the best balance sheet among large oil field services stocks, synergies left to exploit after its merger and robust energy prices, the stock fell an annualized 55%.

Our goal at Heard on the Street is to give readers strong research and analysis to help them make better investing decisions. Maybe we should leave the actual stock picking to the monkeys.

Appeared in the December 29, 2017, print edition as ‘Winners and Losers of Heard’s Stock-Picking Event.’

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