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2006 Year in Review

Posted on December 24, 2006

Due to requests from several subscribers, we have prepared an updated
spreadsheet, which details the returns from the picks we have mentioned
on EnvoyGlobalResearch.com and CasinoCapitalism.com over the past year.

To access this spreadsheet, please click here.

We’ll note briefly that since starting this site a little over a year
ago, we have profiled 30 companies. Out of our 30 picks, only 8 have
produced losses. Overall, our average stock pick returned 45% during
the last year.
Interestingly, half of our losses are from some recent stock picks, and
we expect that these losses will be reversed over the coming year.

If you’ve followed our picks for some time, you probably already know that we are usually early in establishing new positions, and as such typically it has taken us several months or longer to begin showing a profit on certain positions. This is why we generally average into our top picks over a three to six month period, and become especially aggressive in purchasing shares when stock prices decline.

Our two best picks in 2006: INAP (managed IP/hosting services) and PGS (seismic data services), both of which soared over 350%+ on the back of impressive turnarounds. PGS was particularly interesting since a significant part of the gain in these shares followed the spin-out of PETRO.ol, which proceeded to double quickly after becoming a separately-traded company. We continue to hold shares in both companies, though we have of course taken some money off the table after these incredible runs.

Our two worst picks in 2006: CCEL.ob (cord blood stem cell preservation) and PSD.to (seismic data). We’ve covered CCEL.ob in prior posts and as for PSD.TO, we’re still holding on as we think this is a good business and we believe that management is intent on maximizing shareholder value over the long-term. We believe the company is still a takeover candidate given the continued consolidation in the seismic sector.

A couple of lessons, some obvious, that we learned again in the past year:

• Buy on Weakness

As we looked thru our results, we noticed that as in past years, we made the most money by buying companies on significant price declines. Of course, this strategy won’t work when buying hyped-up companies with weak balance sheets and little in the way of historical operating results, but it clearly works when the company you are buying has a strong balance sheet, a stable core business, and a cheap valuation. This is why we continue to buy PTEC and EXTR on recent price weakness.

• Focus on Valuation Last, Not First

Clearly valuation is a very important metric to consider when buying stocks, but it’s only one of many factors. When looking at our results, we noticed that the companies we bought primarily based on valuation factors, significantly underperformed other companies where our reason for buying was influenced by other business factors and where the valuation merely supported our investment thesis.

• Hang On To Value

This past year we missed several 100%+ gains in stocks where we simply got bored of holding on following several years of little movement in their stock prices. But, there is really never a reason to sell a stock out of boredom. Once again, as long as the balance sheet is strong, there is a stable core business, management is in invested at near current price levels, and the valuation is fair, the best course of action is to just hold on or buy more. Time is on the side of value investors. Of course, if any of the above four factors does not hold, simply sell and never look back.

• Stay Diversified

We honestly have no clue in advance which stock picks will work out well, and which will prove disastrous. In fact, we don’t think it is logical for any passive investor with absolutely no say in the managment of a company to really place that much faith in any particular investment . The most we can merely do is play the long-term favorable odds by investing in low-risk/high-return situations.  In recognition of this basic ignorance and lack of management control, we stay diversified and never get "married" to one particular stock. In any case, since we generally have one or two new low-risk stock ideas every month, devotion to one idea is clearly unnecessary.

• Avoid Extensive Contact with Management

We found it interesting that in looking over our results this year, our worst picks were those in which we invested a significant amount of time talking with management. At the same time, with many of  our best investments we never spoke with management and in some cases we never listened to a conference call.

What happened here? We posit that talking with management extensively is somewhat dangerous to your investment health as in doing so one can become too emotionally attached to the stock and find it difficult to take an objective view of the investment situation, especially since management is always selling you the bullish side of the story.

All in all, reading the SEC filings and analyzing what management did rather than
said, should provide all the information needed to make intelligent
and objective investment decisions.

In closing, Happy Holidays to all our subscribers and best wishes for a successful 2007.

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Disclaimer:
This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

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