Armchair Guru
The Oracle Of Manitoba
Matthew Schifrin @ Forbes.com 06.16.08, 12:00 AM ET

Randolph McDuff may be the best stock picker the world has never heard of

“Discipline” and “patience” are probably the two most valuable words in value investing. It stands to reason, then, that few places would serve as better incubators for a value investor than The Pas, in Manitoba. Close to polar bear country, where Hudson Bay winds chill the air to 40 degrees below zero and the wait for spring lasts eight months, The Pas is the hometown of Randolph McDuff, a stock picker with an astounding record.

Since McDuff began running his RMG ValueCatalyst small-company fund eight years ago, he has earned a compound annual return of 36.4%. Not a single diversified stock fund in Lipper Analytical’s universe of 1,555 mutual funds can match that. Ken Heebner’s CGM Focus Fund comes closest at 32.2% a year over the same period. McDuff’s RMG Value Oriented Growth, which buys large companies like Bayer and Fresenius Medical, comes in third at 25.5%. Warren Buffett’s Berkshire Hathaway has returned a compound annual 11% over that period; the s&p 500, 1.1% (including dividends).

What’s McDuff’s secret? “The [securities] industry rewards analysts for boring, homogenous work and penalizes those who provide truly insightful views,” he says. “I typically own companies the industry doesn’t cover, covers poorly or covers with largely plagiarized reports.”

For anyone who likes McDuff’s perspective, and track record, the bad news is that you can’t hitch a ride directly on RMG ValueCatalyst because it’s a mutual fund on paper only. McDuff set up the simulation on the investing Web site Marketocracy.com, where his results are monitored and he is ranked number one among 70,000 managers. If you want to play along and have at least $50,000 to invest, Marketocracy Capital Management will mimic McDuff’s portfolio for a fee of 1.9% of assets a year.

Now living in Winnipeg with his wife, Bridget, McDuff picks stocks with a desktop computer and online brokerage account–plus the heavy research he learned to do growing up. “Because it’s so damn cold in The Pas, there was nothing to do but read,” says McDuff, 43. “I’d spend hours at the library reading financial periodicals.”

McDuff was always drawn more to the challenge of investing than to the trappings of high finance. After graduating from the University of Manitoba with an economics degree in 1986, he spent 14 years as a stockbroker with Bank of Montreal’s BMO Nesbitt Burns. By 2000 he’d saved $2 million and decided it was enough. He quit his job at age 37 to try managing money–his own and the virtual kind.

“While my colleagues were living the high life, I was saving,” McDuff says, “still driving my 1991 Toyota 4Runner and living in my $150,000 house.”

To learn if he had what it took to manage a mutual fund, McDuff signed up with Marketocracy.com. It is one of a score of sites that monitor members’ stock picking prowess (another is run by Forbes.com and affiliate Investopedia at http://stocks.forbes.com).

It’s American Idol for stock buffs. Some of these sites, like Motley Fool’s Caps and TheStreet.com’s Stockpickr, help members select stocks and share ideas. Covestor and Cake Financial tap into brokerage records, monitor performance and may soon charge members to look over the shoulders of their savviest peers.

Marketocracy.com launched in 2000 to find the best stock pickers and turn them into real money managers. It’s one of the oldest stock picking sites around, meaning its members have some of the longest verifiable track records.

McDuff joined in July 2000, less than a month after Marketocracy.com started up, and just as tech stocks were melting down. He created large- and small-cap funds seeded with $1 million each in virtual money. Separately, he has invested his own savings in all his virtual picks.

The value Marketocracy.com’s simulation adds is in exposing would-be money managers to the rigors of running a real mutual fund. Participants must declare a fund objective and avoid style drift or overconcentration in a few stocks, either of which can get a manager disqualified.

As a value manager, McDuff has a strategy best described as Warren Buffett meets Sir John Templeton. Like Buffett, McDuff looks for high operating profit margins (Ebitda divided by sales), a strong balance sheet and market power (monopoly or duopoly). Like Templeton, McDuff looks far and wide for firms that fit this bill but are also still cheap.

To McDuff, cheap means having a lower enterprise ratio than competitors. That ratio is the enterprise value (market capitalization plus debt minus cash) divided by operating income (in the sense of earnings before interest, taxes, depreciation and amortization). Analysts use the ratio under the column heading ev/Ebitda. McDuff says it beats the classic price/earnings ratio because it captures an element of balance-sheet health.

Before buying a stock, McDuff writes up a 1,000- to 2,000-word thesis on why it’s a buy and shares it on a few investing Web sites. “It’s very cathartic,” he says.

McDuff scored big early BPZ Resources. Other winners include MasterCard and diabetes care specialist Novo Nordisk.

Seven months ago McDuff began buying Nestlé. Last year the Swiss food purveyor (Perrier, Purina, Carnation) spent $9.5 billion on major acquisitions without even consuming its net income (which was $10.4 billion). Despite that, and a $195 billion market value, Nestlé trades in the U.S. on the microcap-heavy Pink Sheets. A mere three North American analysts cover the firm. Rival Pepsi, one-third the size, is followed by 17. McDuff likes that Nestlé’s managers seem to be in business to enrich the owners rather than themselves. “Senior management, including directors, took home $49 million last year,” McDuff says. “That’s about half what Pepsi’s management was paid.”

McDuff scouts for overlooked sectors, too, and is big on airports. Since airport privatization is still a foreign concept, airports are mostly ignored here, he says.

“The revenue streams are the stuff that most commercial real estate investors would kill to earn,” says his investment thesis. “Charges include departure taxes, landing fees, baggage-handling fees and aircraft fuelling costs. … Almost everyone who visits an airport pays some sort of fee. It’s not unusual for them to have [operating] margins of 60% to 70%.”

McDuff’s favorite is Beijing Capital International Airport. North Americans have missed this one in part because it trades like a penny stock, at $1.08 a share over the counter. Yet with four billion shares out, its value exceeds $4 billion. Revenues have grown 14% annually since 2000. Last year it reported $500 million in revenue and $315 million in cash flow (in the sense of earnings before interest, taxes, depreciation and amortization). Those numbers will go up. Beijing just completed Terminal 3, the world’s largest. Fast-rising revenues and an enterprise ratio of 15 tell McDuff that the shares will take off. He also likes Mexico’s Grupo Aeroportuario del Sureste, listed on the New York Stock Exchange.

For all his worldly success investing, McDuff says he’s happy making enough to live comfortably. Marketocracy.com passes on to McDuff a cut of the fees it earns from his portfolio. McDuff donates the proceeds ($1,000 in the last quarter) to the charity American Water Relief.

Tags: Marketocracy

James Warren at The Chicago Tribune writes:

In case you assume that the smartest stock picker on the planet lives in Omaha, prepare for word that he might actually reside in The Pas, a Manitoba town located near polar bear country.

June 16 Forbes introduces “The Oracle of Manitoba,” Randolph McDuff, whose track record (at least in recent years) appears to surpass Omaha’s legendary Warren Buffett. Indeed, “Since McDuff began running his RMG ValueCatalyst small-company fund eight years ago, he has earned a compound annual return of 36.4 percent. Not a single diversified stock fund in Lipper Analytical’s universe of 1,555 mutual funds can match that.”

By comparison, Buffett’s Berkshire Hathaway has returned 11 percent over the same period. So the Canadian McDuff’s self-professed modus operandi? “The [securities] industry rewards analysts for boring, homogenous work and penalizes those who provide truly insightful views. I typically own companies the industry doesn’t cover, covers poorly or covers with largely plagiarized reports.”

Before you pick up the phone, there’s a hitch, namely that his fund is only on paper because he created the simulation on an investing Web site called Marketocracy.com, where one can monitor his results and where he’s ranked the best of 70,000 managers.

If you have at least $50,000, Marketocracy Capital Management will ape McDuff’s portfolio for a fee of 1.9 percent of assets each year. Those now on his buy list include American Pacific Corp. (specialty chemicals) and Nestle SA (consumer products).

Tags: Marketocracy

Mike Hogan of Barron’s writes:

YOU DON’T NEED CAMERON DIAZ’ LOOKS OR WARREN BUFFETT’S smarts to achieve stardom on the ‘Net. Sometimes, it just takes a good eye for picking stocks — the kind that SpecBear, TDRH and dwot possess.

Correctly calling the direction of the stocks in his virtual portfolio 83% of the time, SpecBear (a.k.a. Spectacled Bear) is numero uno in the 57,000-strong Motley Fool CAPS community (http://caps.fool.com) — at least for now. No. 2, TDRH, whose picks turn a profit just as often, trails him only because SpecBear has made more selections. Meanwhile, dwot’s 80% accuracy rating puts her 19th.

The usually anonymous bloggers (some asked Barron’s to use only pseudonyms in print) who are considered All-Stars tend to draw a crowd: More than 2,100 groupies follow SpecBear’s moves — Motley Fool groupies being other CAPS players who try to draft behind the investing expertise of All-Stars by following their portfolios and blogs, and swapping news and ideas with them. “I get lots of insights from them, too,” notes TDRH, a 40-year-old St. Louis-based sales representative named James Hill. He tracks the work of 40 other All-Stars.

Like all the investors mentioned here, TDRH has no professional investing background, but his personal portfolio has grown 6% so far this year on oil-service picks like McDermott International (ticker: MDR), versus about a 5% drop for the S&P 500 year to date. His market education began in the spring of 2006, when he first tried out his ideas on CAPS — just one of many social-investing sites.

The sites are like an electronic version of investing clubs. Their names often suggest their mission: Marketocracy (www.marketocracy.com); Tickerspy (www.tickerspy.com); Social Picks (www.socialpicks.com), whose motto is “Invest Smarter Together,” and StockPickr (www.stockpickr.com), where stars like Buffett are held up for emulation alongside community members who do the best job of emulating them. (Motley Fool’s CAPS refer to colored hats awarded based on an investor’s score of correct picks.)

There’s usually plenty of news and research to be had, personal blogs and other ways to share ideas, and electronic cubbyholes for storing your investing inputs, from e-mails to articles. Most members like to check how they’re doing frequently, so there’s an investing simulation, with a variety of benchmarks. And winning takes commitment. SpecBear had to make more than 450 picks to get his ranking; TDRH logs a couple of hours a day. Dwot (née Deborah Wotherspoon) says she regularly spends four-to-five-hour stretches researching, reading or blogging about stocks.

HERS IS A FAMILIAR STORY. A high school teacher in Canada’s Yukon Territory, Wotherspoon got tired of having professionals lose money for her. So she began building her own model portfolios in the summer of 2006, tripling her real portfolio’s value in 15 months — mostly on Canadian mining stocks — before going to cash in the market peak last autumn.

Her investing philosophy isn’t any more complicated than buying a stock she “likes,” and selling when she doesn’t “like it any more.” No charting, no fundamental analysis — just a careful shopper’s sixth sense of what’s hot and what’s not. But the four to five hours a day she spends sifting blogs and news stories don’t hurt.

Her approach is similar to that of T.J. White, whose virtual portfolios are among the most-watched on Marketocracy. Another self-made investor, White has a knack for putting obscure facts together — concluding, for example, that global warming will impact copper prices by melting the glaciers that feed the streams that feed hydroelectric plants powering Chilean copper mines. His onscreen avatar, “auminer,” reflects the days he panned for gold in the Rockies, before discovering his life’s work as a puppy-sitter in a small town near Dallas. His portfolio, he says, throws off about $100,000 a year, affording the 39-year-old a lifestyle that his passion for animals never could.

White’s secret is to focus on sectors that he understands: mining, industrial, materials and energy names that he calls “blue-collar, profitable, dividend-paying stocks.” He steers clear of tech, biotech, pharmaceuticals — anything subject to catastrophic “black swans,” like a loss of Food and Drug Administration approval. He pays a lot of attention to an issue’s net tangible asset value and price/earnings growth (or PEG) ratio, but not so much to its P/E or technical analysis, which he calls “voodoo.” While his screens carry 7,000 stocks and his 15 Marketocracy portfolios total 300 to 400 names, White rarely holds more than a few stocks. Right now, mining-giant Freeport-McMoRan (FCX) dominates.

Spurning diversification, White says, “I don’t want to put money into my sixth-worst pick.” Surprisingly, his portfolio’s beta is under 1.0, meaning it’s less risky than the Standard & Poor’s 500. His alpha is something else; White’s materials portfolio has quadrupled in value in five years.

Know your strengths and sectors also is the motto of Rajan Rajen, 36, one of the most-watched members of Tickerspy. The San Francisco-based software engineer is a prolific portfolio-builder, reports Tickerspy’s community manager, Max Magee, and Rajen’s picks consistently garner the most eyeballs due to his spade work. Rajen identifies a sector he finds interesting, then digs deep into the companies and metrics that drive it. Although he’s managing dozens of sector portfolios at any given time, he leans toward energy, commodities, materials, China and Brazil. His current favorite, Petrolio Brasileiro (PBR), has helped lift his own portfolio 5% this year.

Rajen, too, learned the old-fashioned way how markets work: by losing money, until he “got it.” His voracious reading and casting of trial portfolios led him to his key investing insight: Good stocks in bad sectors don’t do very well. The personal motivation for his hard work, besides money, of course, is to gain more insight into the world. “I just feel more comfortable in life after I’ve gotten a handle on some aspect of the market or the economy,” he says.

Validation is a big part of the payoff on social-investor sites, which seem to be multiplying. Still in beta, Bullpoo (http://bullpoo.com) promotes “connected investing.” Another new site, UpDown (www.updown.com), is building its membership by paying real dough to any virtual portfolio manager who beats the Standard & Poor’s 500 in a given month.

If a dozen heads are better than one, imagine how well thousands gathered in an electronic square can do.

Tags: Cake, Marketocracy, SocialPicks

There are three videos that will play one after the other when you click on this link to MSN Video. He spends a lot of time talking about his largest and favorite position, Elan Pharmaceuticals (ELN), but it’s also useful to see how he thinks.

Tags: Marketocracy

From Forbes.com:

Guru Picks
Gurus Cruise With Hertz, Bail On Medtronic
Joshua Lipton, data from Marketocracy 05.28.08, 7:20 PM ET

Ahead of Memorial Day weekend, stock market investors read over the latest news about oil prices and existing home sales and decided it was time to take profits if they had them.

Spooked by crude’s relentless upward trajectory and data from the National Association of Retailers showing another drop in existing home sales, investors couldn’t stomach staying committed to this market. Instead, they bailed: The Dow Jones industrial gave up 145.99 points, or 1.2% to 12479.63 Friday, and finished down 3.9% for the week.

But even in the most skittish of markets, there are still opportunities for those investors willing to do their homework and shoulder some risk. That was what the best-performing online investors, Marketocracy’s M100, did last week as these gurus got to work tracking down smart bets.

Significant buys for the M100 last week included car rental company Hertz Global Holdings.

The company operates from 8,000 locations in 145 countries worldwide. Hertz is the No. 1 airport car rental brand in the U.S. and at 69 major airports in Europe.

There are risks here that investors should consider. Analysts following the company write that Hertz is at the mercy of the travel industry. When consumers decide to stay home, rather than take the kids on the road for a family vacation, the company suffers decreased demand. Also, analysts argue, Ford and General Motors provide 50% of Hertz’s fleet, leaving the company vulnerable to fleet price increases imposed by these car manufacturers.

But bulls put forward a few reasons for hope here including powerful brand awareness and large market share. Analysts also note that Hertz is expanding its off-airport car rental locations, which are more profitable and less sensitive to the cyclical travel economy.

The M100 also figured this one was a bargain: Hertz is pretty cheap relative to its expected earnings power, with a price-to-earnings growth ratio of just 0.73. Its industry average is 0.99.

The stock here hasn’t been a performer over the past year. But it has shown a nice 4% pop over the past month, still trading well below its 52-week high of $27.20. Chairman and Chief Executive Officer Mark P. Frissora, and other members of senior management, will present an overview of the company’s strategies, operations and financial results on Wednesday, May 28. Ahead of that presentation, the M100 carved out a stake.

From rental cars to fighter jets: The gurus also decided last week to commit capital to Lockheed Martin.

Also noteworthy last week: Lockheed Martin put out some good news. The company said that the Department of Defense authorized the purchase of six F-35A aircraft for the Air Force and tentatively approved the purchase of six F-35B aircraft for the Marine Corps. The contract is worth $2.2 billion.

Bulls write that Lockheed benefits from its sheer size and scope–it’s the largest defense company in the world. Analysts following the firm also write that much of the company’s $76 billion backlog is made up of multiyear contracts, offering investors visibility concerning future revenue growth.

Lockheed Martin has also shared in the good times with its shareholders. Morningstar analyst Marisa Thompson, who follows the company, says more prudent cost management and improved capital discipline is driving higher returns on capital and strong free cash flow. Lockheed has used that strong cash position to repurchase 11 million shares for $1.2 billion, and the company has another 21 million shares under the repurchase authorization.

“We expect that the firm has plenty of leeway to continue repurchasing shares and returning cash to shareholders,” Thompson wrote in a recent research note.

She points out that operating profit margins have expanded from 4% to more than 10% due to volume gains, new programs and better cost management. The company is in excellent financial health, as its debt-to-capital ratio has steady improved since the 1990s and now stands at around 30%, Thompson says.

In addition, Lockheed Martin still looks like a pretty good deal: It isn’t too expensive relative to its earnings, both now and looking ahead.

Lockheed Martin will Webcast live a presentation by CEO Bob Stevens on Thursday, May 29. Stevens will highlight the corporation’s performance and growth strategy. Ahead of that presentation, the M100 moved in.

Other buys for the Marketocracy gurus last week included Chiquita Brands International, an international marketer and distributor of fresh food products. The M100 also pushed hard into a couple exchange-traded funds, including Market Vectors Steel, which tracks the AMEX Steel Index. Additionally, they picked up the WisdomTree Emerging Markets High-Yielding Equity Fund, which tracks the performance of the WisdomTree Emerging Markets High-Yielding Equity index. This is a fundamentally weighed index that measures the performance of the highest dividend-yielding stocks selected from the WisdomTree Emerging Markets Dividend Index.

On the sell side, our gurus found a few companies they thought it was time to bail on.

They jumped out of medical-device maker Medtronic. Last week, the company announced better than expected sales, mostly due to its products that help the heart, such as defibrillators and pacemakers.

The Minneapolis-based company reported an 18.2% jump in revenues to $3.9 billion in the fiscal fourth quarter. Two major product categories drove sales up–Cardiac Rhythm Management and Cardiovascular. Despite the large sales jump, earnings for the quarter were flat at $812.0 million, or 74 cents per share, as compared with $812.0 million, or 70 cents per share, in the year-prior quarter. Analysts surveyed by Thomson Financial had expected earnings of 72 cents per share on revenues of $3.7 billion. (See “Medtronic Has A Heart.”)

The stock of Medtronic enjoyed a nice pop on the news, climbing 4.6% in the past five days. The M100 decided to book profit.

Our gurus also parachuted out of software maker SAP AG, travel Web site Ctrip.com International and Associated Banc-Corp. Lastly, in a bullish move on technology, the M100 unwound their positions in UltraShort Technology ProShares, an ETF that moves double in the opposite direction of the Dow Jones U.S. Technology index.

In Pictures: Five Buys, Five Sells

Guru Buys

Hertz Global Holdings

Lockheed Martin

Chiquita Brands International

Market Vectors Steel

WisdomTree Emerging Markets High-Yielding Equity Fund

Guru Sells

Medtronic

SAP AG

Ctrip.com International

Associated Banc-Corp

UltraShort Technology ProShares

Marketocracy.com tracks more than 60,000 online stock portfolios. Of those, the top 100 performing portfolios, the M100, are used to create a real-life mutual fund, the Masters 100 Fund, which is managed by founder Ken Kam. Each week, Guru Picks analyzes the buys and sells of the M100. Click here for more information about Marketocracy.com and its money management services.

Tags: Marketocracy

Joshua Lipton 05.12.08, 5:40 PM ET

After a very quick run up from its March 10 low, Wall Street wheezed its way into the red last week.

The Dow Jones Industrial Average gave up 2.4%, on the week, finishing at 12,745.88. Investors grew worried by more losses in the financial sector and crude’s continued march to record highs. Oil’s runaway price surge leaves investors concerned about whether the already soft U.S. economy might weaken even further under the pressure of higher oil and gas prices.

The best performing online investors, Marketocracy’s M100, have continued to emphasize energy in their portfolios. That has proven to be a wise bet. This earnings season, companies in the energy sector reported the highest earnings growth rate of any sector at 26%, according to Thomson Reuters.

Where does oil go from here? Last week, Goldman Sachs oil analyst Arjun Murti said that he thinks the price of oil could spike to $150-$200 a barrel over the next six to 24 months. Murti boasts some credibility on the issue: He was also the analyst that predicted back in March 2005, when oil traded at around $50 a barrel, that the price would super-spike to $105 a barrel.

Longtime market pro Ed Yardeni thinks $200 oil is unlikely as slowing economic activity around the globe ratchets down demand for oil. Yardeni says it would take a fairly serious supply disruption triggered by a geopolitical crisis to drive prices up to $200 a barrel.

“Admittedly, there is one in the works as tensions mount between the U.S. and Iran,” Yardeni writes.

The M100 certainly seem to think that investing in energy will continue to reward them with pleasing returns. A year ago, the M100’s energy holdings made up 13% of their combined portfolios. Now their holdings are approaching 25% of their overall portfolios.

The latest buy: Continental Resources, an oil and gas producer with operations in the Rocky Mountain, Mid-Continent and Gulf Coast regions of the United States. Last week, the company, which has a market capitalization of about $9 billion, reported that its profit skyrocketed 64% in the first quarter as oil prices climbed to new highs.

Continental Resources said it raked in $88 million, or 52 cents per share vs. $53.8 million, or 34 cents per share, in the first quarter of last year. That was enough to beat the Street’s expectations. Analysts had predicted profit of 49 cents per share.

Record energy prices continue to pad the company’s bottom line. The average price the company commanded for a barrel of oil jumped during the first quarter to $81.35 from $46.47 in the year-ago period.

The question now for the company is what to do with all this money from the boom times. Continental said it’s going to use some of the cash it is generating from higher energy prices to invest in more drilling. The company forecasts its production by the end of the year to increase 42% from its current production levels.

In Pictures: Five Buys, Five Sells

Continental Resources had enjoyed a monster run up. The stock has surged more than 277% in just the past 12 months. But our M100 think there is still more room to the upside here.

Compared to its direct competitors, Continental Resources is much more profitable with operating margins of 48.95% for the trailing 12 months. It’s also still very cheap relative to its expected earnings power, with a price-to-earnings growth ratio of just 0.47. (Anything less than one is considered a good deal.) The M100 carved out a big position.

Hedging their bets against a slowing economy, the M100 also decided it would be wise to pick up a classic recession-proof play. So the gurus looked to the consumer staples sector, where they decided it was time to push cash into candy maker Cadbury.

Last week, on May 7, Cadbury and Dr Pepper Snapple Group officially parted ways and began trading under individual tickers.

Analysts following Cadbury point out bullish reasons to own the stock: They write that the company leads the worldwide confectionery industry with 10% global share and competes in all three segments: chocolate, sugar and gum. There are also a lot of candy lovers across the pond: One-third of confectionery sales are in emerging markets.

Also, analysts write, Cadbury has proved it can expand its confectionery business not only in emerging markets but also through innovation (liquid-filled, sugar-free gum), new products (Stride) and expanded distribution of existing brands (Trident in the U.K.).

Finally, and perhaps most alluringly for opportunistic investors like our M100, the recent decision of rival Mars to purchase Wrigley for $23 billion puts pressure on Cadbury to do a deal of its own. The Wrigley acquisition will give Mars over $27 billion in sales. The standalone confectionery division could now look ripe for a takeover.

One possibility is that Hershey will feel the pressure from the Mars deal and reconsider a merger with Cadbury. Although the two firms have chatted about teaming up in the past, the Hershey Trust’s refusal to dilute its 78% control of voting rights in Hershey was an apparently insurmountable roadblock. (See: “Cadbury Climbs On Wrigley Deal“.)

Still, the M100 clearly believe that a deal getting done here remains a real possibility. They aggressively committed capital to the candy maker.

Other major buys for the M100 included silicon wafer maker MEMC Electronic Materials, oil and gas company Rosetta Resources and CryoLife, a biomaterials, medical device and tissue processing company.

On the sell side last week, the M100 bailed out of chip maker Sigma Designs.

Analysts explain that Sigma creates chip designs that power set-top boxes that receive, decode and reassemble IPTV signals. IPTV, which stands for Internet protocol television, delivers video to peoples’ homes via standard telephone lines. IPTV is common across the pond, in Europe and Asia, where there are low levels of cable TV penetration.

Morningstar analyst Eric Kobayashi-Solomon, who covers the company, notes that Sigma was one of the early pioneers in this specialized field, and it maintains more than 75% global market share in these semiconductor chips.

However, the analyst warned clients in a research note that he has twin concerns about Sigma: First, he says there are worries about whether Sigma, which has a market capitalization of just $540 million, can really compete against larger rivals like Broadcom.

Also, he points out that Sigma has been hindered by questions about options back-dating and has had to employ two different auditors and three different chief financial officer’s since early 2007.

“Our discussions with management lead us to believe that these issues are not deeper signs of malfeasance, but we recommend potential investors to consider their individual risk tolerance before investing in this firm,” Kobayashi-Solomon wrote.

Sigma’s stock hasn’t been an investor-pleaser. It’s down about 30% in the past year and 60% in the past six months. The M100 decided it was time to move on.

Other sells for the gurus included health care company Baxter International, insurance company National Atlantic Holdings, investment manager Legg Mason, and Rydex S&P Smallcap 600 Pure Value, an exchange-traded fund that tracks the performance of the S&P Smallcap 600/Citigroup Pure Value index.

Guru Buys

Continental Resources

Cadbury

MEMC Electronic Materials

Rosetta Resources

CryoLife

Guru Sells

Sigma Designs

Baxter International

National Atlantic Holdings

Legg Mason

Rydex S&P Smallcap 600 Pure Value

Marketocracy.com tracks more than 60,000 online stock portfolios. Of those, the top 100 performing portfolios, the M100, are used to create a real-life mutual fund, the Masters 100 Fund, which is managed by founder Ken Kam. Each week, Guru Picks analyzes the buys and sells of the M100. Click here for more information about Marketocracy.com and its money management services.

Tags: Marketocracy

We all dream of finding the next Warren Buffet. But even Warren Buffet is having trouble finding the next Warren Buffet. And, he’s not the only one having trouble. Out of over 11,000 mutual funds, almost 70% have replaced their managers in the last 5 years. That’s a pretty high failure rate. The scarcity of investment talent is the perhaps the single biggest reason why there are so few mutual funds that I found worth recommending as a core holding.  Click here for the list

Actually, there is a good reason why there are so few great investors. When it comes to investing,  mistakes can cost thousands of dollars. Since everyone is bound to make mistakes when they are getting started, it is hard to get enough practice to become a great investor without going broke in the process. If the same was true of golf, there would be just as few great golfers as there are great investors.

The truth is that beginning investors should be just as cautious about trading with real money as a beginning pilot would be about his first solo flight. That is why I recommend that investors practice with a model portfolio before putting their real money at risk. To start now, click here. More than 100,000 people have set up a model portfolio at Marketocracy. And, over 30,000 have track records that are now more than 5 years old. We have signed research contracts with about 500 of them. This is the talent pool from which we choose our m100 team.

The reason so few core funds even exist is because no single investor has the expertise to do well in every industry. Consequently, in order to provide diversification and still have a chance to outperform the S&P 500, you need more than just one skilled investor, you need a team. That’s why I would rather have the m100 as my team instead of just hiring the one person with the best track record. Because we have so many skilled investors under contract with us, we are better able to run a core fund than almost any other firm.

If a fund could beat the S&P 500 every day, month, quarter, and year, it would be  easy to recommend it as a core holding. Of course, no one can promise that but it is a goal all core fund managers should strive for.  To measure our progress towards this goal, we use a metric we call the success ratio — the percentage of all of the days over a period of time when the m100 beat the S&P 500 after a specified holding period. For the last 3 years, here are the m100’s success ratios for various holding periods.

Holding Period     Success Ratio
1 month                59%
1 Quarter              67%
1 Year                73%
2 Years                96%

Since 2005, the m100 had a 59% chance of beating the S&P 500 after a holding period of just 1 month. With a holding period of 1 quarter there was a 67% chance of beating the S&P 500. The longer the holding period, the more likely it was that the m100 did better than an S&P 500 index fund. I would never recommend that anyone with a time horizon of 1 month, or even 1 quarter, invest in stocks. But for those with an investment horizon of at least 2 years, I think the m100 is a great team for a core portfolio.

Keep in mind that these statistics are for the m100 not the Masters 100 Fund. Even if the m100 does well, I am the Fund’s manager and I could still screw it up. However, over the weekend, Morningstar upgraded our Fund to 4 stars overall, and 5 stars for the past 3 years. So, I haven’t screwed things up too badly — at least not in the last 3 years!

Tags: Marketocracy

Petitt Funds (a blog run by a Marketocracy Top 10 member) writes:

Cool!

The mutual fund that is run pursuant to the selections of the Marketocracy organization that I have been a part of for the last 5 years has just been upgraded by Morningstar to a 4-star fund (5-stars for the last 3 years!)

This should have happened sooner, except for a bad year a few years back–which was when Marketocracy took another look at how they were going to be making future selections. They had been buying hundreds and hundreds of stocks based on the selections of their Top 100 investors, and after their bad year started limiting their purchases to those recommended by only the Top 10 investors–which group I have belonged to for the last 3 years. Most of the stocks I have recommended here have ended up being holdings of the mutual fund.

While I have been through a less-than-stellar year since late last summer, if you visit the Marketocracy site you are going to see incredible performances by the other members of the “m10″ (what Marketocracy calls their Top Ten). Hopefully, I’m just pausing to catch my breath…

Anyway, it is exciting to see this experiment starting to pay off for the Marketocracy bunch. I’m going to encourage my kids to put some of their Roth IRA money into the fund.

FULL DISCLOSURE: As a member of the m10, I get a tiny percentage of the “Assets Under Management” each quarter–so of course I may be encouraging all of you to invest there out of sheer greed! Take anything I say with a grain of salt. Furthermore, past performance is no guarantee of future results (I think I read that somewhere…) Oh, yeah–and the Marketocracy site and the Marketocracy Masters 100 Fund are two separate and unrelated entities, blah, blah, and anything else I’m supposed to say to keep the SEC at bay.

Tags: Marketocracy

Larry Macdonald at The Globe and Mail writes:

IAN ST. MARTIN

AGE: 43

OCCUPATION: Software engineer turned professional investor.

PORTFOLIO: Astea International Inc., WPCS International Inc., Optelecom-NKF Inc., Ceradyne Inc., Excel Maritime Carriers Ltd., Span-America Medical Systems Inc. and lots of cash. Mr. St. Martin’s portfolio is very fluid and may be different from when he described it as of March 31.

INVESTMENT RESULTS

Mr. St. Martin, who resides in Vancouver, has a virtual portfolio on Marketocracy.com that has long been in the top 100 of more than 50,000 portfolios tracked on the U.S. website. Although growth has tapered off in the past year, the portfolio has an annualized return of 32.2 per cent since inception in May of 2001, compared with 2.6 per cent in the S&P 500 over the same period.

HOW HE STARTED

“I started dabbling in stocks in the 1990s, when I started to have some extra income from my job,” Mr. St. Martin says. “However, I never took it seriously until after the crash of March, 2000. That event led me to a much deeper investigation of the market. I wanted to see if I could find any rhyme or reason to the seemingly wild gyrations of the market.”

HOW HE INVESTS

“My search took me to William O’Neil [the founder of Investor’s Business Daily] and his CAN SLIM system. From there, I developed my own style,” he adds. The new approach proved to be enough of a winner to help him land a position as chief research analyst with Vancouver-based Asset Logics U.S. Long-Short Equity Fund (until February of this year).

He screens the earnings reports of public U.S. companies daily, looking for strong revenue and earnings growth, increasing margins, robust balance sheets, and modest valuations when compared to peers. For companies meeting his criteria, he looks at their press releases and filings to see if growth is sustainable.

That leaves a smaller number of prospects, all of which go on to a watch list. He’ll pounce if he sees a spike in trading volume and an upside price move - especially if valuation is still reasonable.

The decision to buy or sell is also informed by the current state of the market. “I don’t try to predict changes in the market trend, but I want to understand where it is right now so that I don’t fight the trend,” Mr. St. Martin said.

Tags: Marketocracy

Joshua Lipton of Forbes.com writes:

Last week brought more tough news about the state of the U.S. economy, all but confirming a recession with plunging consumer confidence while energy prices soared even higher, unfazed by the fresh news of economic weakness.

Stock market investors decided to stay optimistic, responding to the latest in a deluge of bad news with a collective “So what?”

Perhaps believing that the worst of the credit contraction is over and that central bankers have staunched the flow out of stocks with aggressive rate cuts, targeted liquidity injections and the bailout of Bear Stearns, investors sent stocks higher.

On Friday, April 28, the Dow Jones Industrial Average climbed 42.91 points, or 0.33%, to 12,891.86. That was the highest close for the blue chips since Jan. 3. The Dow rose 0.33% for the week.

The best-performing online investors, Marketocracy’s M100, were busy hunting for smart bargains last week. One area of the market these gurus have continued to favor: energy. In fact, it’s one of the few areas of the market that continues to please investors.

So far this reporting season, earnings are coming in 14.1% lower, on average, than they were a year ago, according to Thomson Reuters. But the story is a bit different when you look at energy. The energy sector is reporting the highest earnings growth rate of any sector at 29% (with 39% of companies reporting as of April 25). If energy sector earnings come in at 29% overall for the quarter, it will mark the highest growth rate for the sector since 2006’s second quarter, says Thomson.

Energy’s strong performance has also helped to make the market look better. Excluding energy, the first-quarter growth rate for the remaining nine sectors would be -20.5%. Longtime market pro Ed Yardeni points out that the sector’s share of the market capitalization of the S&P 500 has increased from a low of 5.4% in November 2003 to 14.3% this April. He now says he wouldn’t be surprised to see energy’s market cap share rise to 25% to 30% by the end of the decade.

Why exactly have oil prices been soaring to new highs? “Maybe all we need to know is that Chinese auto sales are rising nearly 20% per year and that they are buying more SUVs and luxury cars as they prosper,” Yardeni says.

The M100 have certainly become believers, increasing their investments in energy. A year ago, the M100’s energy holdings made up 13.85% of their combined portfolios. Now energy accounts for 24% of their overall portfolios.

One position in the space that the gurus added to last week was independent oil and gas producer Cabot Oil & Gas.

The Houston-based company has operations in the U.S. Gulf Coast, mid-continent, Rockies, and Appalachia. Analysts note that Cabot, which has a market capitalization of about $6 billion, has a very long operating history: It has produced natural gas since the late 1800s as part of its old parent, Cabot Corporation.

Bulls on the stock argue there are a few reasons why investors should consider pushing cash into this stock. Recent discoveries in gas zones in Appalachia and east Texas make Cabot’s properties more attractive. The company’s properties are among the most diverse of the small oil and gas companies, and they are all in North America, which limits the kind of political risk competitors have to deal with when they do business overseas.

Analysts following the stock also write that Cabot’s financial health is better than average compared with other small oil and gas producers. That’s helped the company maintain profitability during industry downturns.

Cabot is a bit pricey relative to its expected growth, with a price-to-expected-growth ratio of 2.81. The industry average is 1.38. But the company does have a much better operating margins that its peers. The stock has popped more than 60% over the past 12 months. It’s now swapping hands for about $58, but that’s still below its 52-week high of $62.

Cabot will release its first-quarter 2008 results on April 30. Ahead of that report, the M100 moved in.

Other buys in the Energy sector last week for the M100 included oil and natural gas producer Arena Resources and independent oil and gas exploration and production company Mariner Energy.

Our gurus were also busy buying stock across the pond, carving out big positions in a handful of exchange-traded funds that track markets in both Asia and Europe. They particularly liked the look of WisdomTree Japan Total Dividend Fund. This is an ETF that tracks the performance of the WisdomTree Japan Dividend index, which measures the performance of dividend-paying companies incorporated in Japan and listed on the Tokyo Stock Exchange. The ETF hasn’t been much of a performer over the past year, down about 9%. But, in the past month, it’s jumped more than 4%.

The M100 are perhaps now banking on a turnaround for the Japanese economy. Earlier this month, the Organisation for Economic Cooperation and Development said it’s seeing a recovery in Japan. The OECD reported that its composite leading indicator (CLI) for Japan was 4.7 points lower than the same month last year. But it did increase 0.4 to 96.7 in February.

The CLI is designed to provide early signals of turning points between upswings and downswings in the growth cycle of economic activity. Recovery is signaled when the CLI is increasing but below 100.

The M100 also liked the look of four other ETFs tracking stocks overseas: iShares MSCI Malaysia, iShares MSCI Japan, iShares MSCI South Korea and iShares MSCI Germany.

The M100 were also just as busy selling last week. One company they no longer consider a sound investment: Diana Shipping, a global shipping company specializing in the transportation of dry bulk cargoes.

The last several years have been terrific ones for dry bulk shippers in general. Surging prices of commodities like iron ore and coal have helped companies like Diana expand margins and grow profitably.

Last year, the company had operating margins of 72.4% and Return on Equity of 23.1%.

But Diana has already enjoyed a monster run, rocketing up more than 50% in the past 12 months and 20% in just the past four weeks. Last week, the company announced that its financial results for the first quarter of 2008 will be released on May 14.

Our M100 decided now was the time to jump ship.

Other top sells for the gurus included telecommunications company Tata Communications, real estate investment trust Medical Properties Trust, biotechnology company Momenta Pharmaceuticals and independent shipping company Euroseas.

Guru Buys:

Cabot Oil and Gas

Arena Resources

Mariner Energy

NRG Energy

Cooper Tire and Rubber

Guru Sells:

Diana Shipping

Tata Communications

Medical Properties Trust

Momenta Pharmaceuticals

Euroseas

Tags: Marketocracy