I’m mortified. For the second year running, my hedge fund beat the market, but my picks for Kiplinger’s stank. Over the past year, the five stocks I recommended buying jumped an average of 39%. But my decision to recommend shorting—that is, betting against—Chipotle Mexican Grill and Salesforce.com backfired. They soared an average of 74%. I covered the shorts in my fund fairly quickly, but I can’t erase those lamebrained recommendations from my Kiplinger record. Thanks to the shorts, the average return of last year’s picks was just 7%, compared with 26% for Standard & Poor’s 500-stock index (returns and prices are as of November 1).
My solution for 2014? No shorts and more longs. For starters, I am re-recommending one of my picks from last year. Ocwen (symbol OCN) is a tech-savvy mortgage servicer (essentially a highly paid bill processor and collector) that specializes in dicey loans. Ocwen’s efficient systems give it a 70% cost advantage over competitors with regard to subprime loans, which leads to more business and better profit margins. The stock could easily rise 50% over the coming year. My other picks are new.
Altisource Residential (RESI), a spinoff from an Ocwen spinoff, is in a related business. It buys baskets of loans that are heading for foreclosure and then either modifies them or takes possession of the collateral. The stock could rise 30% over the coming year. I also expect a big dividend increase.
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Baker Hughes (BHI) is the third-largest energy-services company in the world, but relatively few people know it. Though it has earned its neglect through poor management, Baker Hughes’s leaders are now determined to improve the firm’s profit margins, which are half those of rival Halliburton. Baker Hughes reported superb third-quarter results, and I think the stock could rise by 33% over the next year.
Bank of America (BAC) is the Rodney Dangerfield of banks. Many investors have shunned it because of problems related to Countrywide, which it bought in 2008. But those troubles now seem to be winding down (and look penny ante compared with those of JPMorgan Chase). BofA’s deposits are growing, and the quality of its loans is improving. The stock could reach $20 over the next year without breaking a sweat.
General Motors Warrants let you magnify gains in a cheap stock in the hot car market. GM’s shares are held back by perceptions that the firm is a loser and by the fact that Uncle Sam will soon sell its stake. When the Treasury unloads, the stock should pop. If you buy GM stock at today’s price of $37 and it goes to $56 over the next year, which I think is possible, you would make 41%. If you owned the warrants, which are like long-term options and in this case are moving dollar for dollar with the stock, you’d make 95%. Of course, if the common falls, the warrants will lose more.
Howard Hughes Corp. (HHC), my largest holding, has tripled in three years, but I think it can rise another 50% in the next 12 months. The firm’s wonderful real estate holdings include 60 acres in Honolulu as well as property in New York City’s South Street Seaport and the booming Woodlands planned community in Houston. When the Hawaii real estate is fully developed, it could be worth Hughes’s entire market value.
Monitise PLC (MONIF) is a leader in mobile-payment software. The London-based firm has struck important deals with Visa and IBM, among others. Visa projects that by 2020, half of its credit and debit purchases will be made using mobile devices. If that forecast is anywhere near accurate, Monitise’s stock could be a monster.
Columnist Andrew Feinberg manages a New York City–based hedge fund called CJA Partners.
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