MARKET MAGIC
Melton's mix of Apple and energy delivers 2005 return of 72 percent
By Dave Segal
dsegal@starbulletin.com
The stars weren't aligned right for many stock pickers in 2005.
Rising interest rates, high oil prices and unspectacular corporate profits all made for a market that was about as flat as a week-old soda.
But Dwight Melton bucked the odds last year. In fact, he decimated them as his hypothetical $20,000 portfolio gained a whopping 72 percent to $34,404.23, outpacing two other local experts in the Honolulu Star-Bulletin's annual contest of best investment ideas.
Melton, co-founder of the Hawaii Stocks and Options Group, rode iPod darling Apple Computer Inc. and energy stocks such as Southwestern Energy Co. and Cal Dive International Inc. to outsized gains. But he wasn't alone in beating the major indexes as fellow local experts Barry Hyman and Richard Dole also did the same -- albeit to a lesser degree.
Hyman, a financial adviser who is vice president of the Maui branch for Michigan-based FIM Group Ltd., posted a 12.5 percent return to increase his portfolio to $22,492.45 while Dole, chief executive officer of investment banker Dole Capital LLC, chalked up a 5 percent gain to boost his holdings to $21,000.12.
By comparison, the Dow Jones industrial average was down 0.6 percent for the year while the Standard & Poor's 500 index was up 3 percent and the Nasdaq composite index was ahead 1.4 percent.
"All my selections are high growth," Melton said. "My whole strategy is really based on the momentum of those individual selections."
Melton, who uses the Value Line Investment Survey and the Investor's Business Daily 100 to help screen his investment ideas, said he finds stocks that are on both top 100 lists, looks at their historical performance, keys on the earnings per share and the relative strength of those stocks compared to the rest of the market, and checks out institutional buying.
"I'm looking for the best of the best," he said. "Institutional buying really has a big impact on a company's overall stock performance."
Melton's momentum strategy left him in stock-split heaven as his five-stock portfolio contained five stock splits during the year. Southwestern Energy, which soared 183.6 percent in 2005, split twice; while Apple Computer, Cal Dive International and retailer American Eagle Outfitters Inc. split once each. Apple ended the year up 123.3 percent, giving Melton two double-your-money picks, while Cal Dive International, which Melton swapped in after the first quarter, rose 58.5 percent over the final nine months. American Eagle Outfitters had its best moments early in the year and then faded to finish down 1.3 percent.
"The only thing I had a concern about is that I should have sold American Eagle early on in the year and replaced it with one of those higher-performing stocks," he said. "I was just hoping for a better performance during the fourth quarter due to the holiday season. The other stocks did as expected."
Melton expects energy stocks to continue doing well as prices continue to rise.
"Southwestern and Cal Dive are going to be beneficiaries of those increased energy prices," he said.
Hyman, a value investor who prefers foreign investments over domestic ones, scored his biggest gains with Denmark-based Vestas Wind Systems A/S, the world's largest windmill maker; 21st Century Holding Co., a property and casualty insurer; and Scudder Global Commodities Stock Fund Inc. Hyman reduced his shares in Vestas by nearly 30 percent at midyear after the stock rose 31.6 percent during the first six months. The shares were down 0.9 percent the second half of 2005.
He also had a solid winner in 21st Century Holding. Hyman had a 10.7 percent gain in the stock during the first six months and then increased his shares by nearly 7 percent for the second six months and saw the stock rise 34.5 percent during that period. Scudder Global Commodities, whose shares he kept constant the entire year, jumped 22.6 percent.
"Double-digit gains in a year when the major indexes barely made ground is favorable," Hyman said. "However, I was a bit surprised by the lackluster performance of the Claymore U.S. Treasury Inflation Protected Securities Fund.
"Because we wanted to be defensive, I overweighted this position. I expected it to provide mid-to-high, single-digit returns to buoy the mini-portfolio in case stocks corrected. Instead, most of my stocks did well while bonds corrected. Go figure."
Claymore gained 2 percent during the first half of the year and then the investment fell 2.1 percent over the final six months after Hyman increased his shares by 15 percent at midyear.
"My projection for the U.S. stock markets a year ago was that they would have a tough time making any ground," Hyman said. "In fact, the levels I predicted for the U.S. indexes were for zero returns.
"I think a correction from current levels would be healthy, so I am not encouraged, nor am I surprised or disappointed. As I've said in the past, investors generally behave in response to emotion based on incomplete information."
Dole also went overseas to find one of his top picks. His selection of Brazilian-based Companhia Vale do Rio Doce, the world's largest iron-ore producer, generated a return of 46.6 percent.
Defense contractor Lockheed Martin Corp. rose 16.5 percent.
"There were a lot of headwinds (during the year such as rising interest rates and high oil prices), but it wasn't a disaster either," Dole said. "If (the year had extended) for one more week, my results would have been much better because a number of things happened. Rio is up over 60 percent (since the beginning of 2005), Newport is up and Pfizer had a dividend increase and won its patent dispute. I don't have any problem with any of my picks. It was just a matter of timing."
Newport Corp., a telecommunications equipment provider that Dole bought after the second quarter, ended off 2.3 percent over the six months that he owned it.
Pfizer Inc., hampered by its warning that pain management drug Celebrex causes increased heart risks, lost 10.6 percent and was the worst performer among the picks that Dole held for the entire year.