My best and worst stocks in 2011

Author: Charles Sizemore

Covestor models: Sizemore Investment Letter and Tactical ETF

For all of the gut-wrenching volatility, 2011 was actually a pretty good year if you managed to avoid financials and materials stocks.  Defensive stocks—particularly those that pay dividends—actually did quite well.

My best pick of the year, ironically, was a financial stock—credit-card giant Visa (NYSE: V), the winner of InvestorPlace’s “10 Stocks for 2011” contest.  Visa was up a full 44 percent for the year, not including dividends.

In Visa, I saw a company supported by powerful macro trends—the shift to a global cashless economy and the rise of the emerging market consumer—whose stock price was temporarily depressed due to regulatory fears.  When the heavy hand of government proved to be a little less heavy, Visa exploded to the upside and has yet to slow down.

If only they could all be that way…

We now come to my biggest failure of 2011: Research in Motion (Nasdaq: RIMM)

I sold RIMM from my Covestor portfolio Sizemore Investment Letter on 12/22 at a 51% loss. [MW: confirmed] When I originally recommended this stock, I knew the company had “issues.”  You don’t find companies as cheap as RIMM that don’t have at least a little something wrong with them.  Still, I thought—and still think—that the bearishness was ridiculously overdone.

I dedicated a fair bit of the last issue of the Sizemore Investment Letter to illustrating how ridiculously cheap RIMM was, and yet the stock has gotten significantly cheaper in just the past three weeks.  In the latest of a long string of disappointments, management announced that its new line of phones would not be out until late 2012 instead of the first quarter, and cited the availability of key component parts as the reason for the delay.

Normally, I would understand how an announcement like that would send the share price down 11 percent in one day.  But given that the company trades for just 4 times already-revised-downward earnings and trades for 0.33 times sales and 0.68 times book value (source), it’s shocking that bad news still has any effect.  At current prices, RIMM could be cut up and sold for spare parts at a profit.  It really defies comprehension given that the company’s subscriber base continues to grow (now up to 75 million).

I continue to believe that RIMM has a bright future as a services company, regardless of what happens with its handsets.  And I haven’t given up on its handsets either.  Even a mild improvement in the company’s fortunes could translate into a 200 percent gain or more.   But in 2011, none of this mattered.  RIMM was a classic value trap…and I walked right into it.

If I am to learn a lesson from this misadventure, it is that a cheap stock can always get cheaper—and that it pays to cut your losses early.