An energy-play gusher was the hands-down winner of The Globe and Mail’s My One and Only stock-picking contest for 2012.
Shares of U.S. oil refiner HollyFrontier Corp. posted an eye-popping 111-per-cent gain (including dividends) in Canadian dollar terms over the year. The stock, which was chosen by David Sherlock, a portfolio manager with Calgary-based McLean & Partners Wealth Management Ltd., left the S&P/TSX Total Return Index’s 7.2-per-cent return in the dust.
HollyFrontier’s stock wasn’t the front-runner during the first three months of the annual contest. But it gained a head of steam as the Texas-based company raised regular dividends, bought back shares and announced five special payouts throughout the year.
It ended 2012 at $46.55 (U.S.) a share – well above Mr. Sherlock’s one-year target of $39.
“It turned out better than I hoped, but I would take some profits now,” says Mr. Sherlock, who also teaches investment courses at Mount Royal University. “There is an old adage – bulls make money, bears make money, pigs get slaughtered.”
Thirteen investment professionals participated in the stock-picking contest. A year ago, each chose one North American-listed security – a stock, an American depositary receipt or an exchange-traded fund – to outperform during 2012. Canadian securities had to have a minimum market value of $100-million (Canadian), while the market capitalization of U.S. stocks had to be above $1-billion (U.S.) to be eligible for selection.
The prize? Eternal bragging rights plus a Globe and Mail coffee mug.
Betting the farm on only one stock is not a strategy that any investor should take in the real world because of the high level of risk involved in betting a single security. Still, Mr. Sherlock’s smart stock pick does demonstrate how astute investors analyze a potential investment.
He made a calculated bet that HollyFrontier would benefit from fat margins because of its access to cheaper West Texas Intermediate (WTI) crude. The commodity has felt the effects of booming output from shale plays in Texas and North Dakota, which has overwhelmed pipeline capacity, creating a glut of WTI at the storage hub in Cushing, Okla. The excess supply has driven down prices for WTI and given inland refiners like HollyFrontier an edge over eastern and Texas Gulf Coast peers, which must pay for costlier North Sea Brent crude.
After its runup, HollyFrontier’s shares are now “fairly valued,” he said. “As long as they beat earnings estimates, they will continue to keep those special dividends going … They have a very strong balance sheet and a lot of cash kicking around.”
Mr. Sherlock was one of nine contestants whose stock picks outpaced the Canadian market. Finance author Gail Bebee, who chose car parts giant Magna International Inc., was the leader after the first quarter, but finished in second place with a near 50-per-cent return. Benj Gallander, president of Contra the Heard investment newsletter, who picked ATS Automation Tooling Systems Inc., came third with a 36-per-cent gain.
Several stocks, including Research In Motion Ltd. and Glacier Media Inc., ended the year in the red with respective losses of 20 and 13.8 per cent. The big surprise was the stunning collapse in the shares of oil field services company Poseidon Concepts Corp., which ended the year with an 87-per-cent loss.
The stock, which was suggested by Sheryl Purdy, a vice president and investment adviser at Leede Financial Markets Inc., was humming along nicely with a 26-per-cent gain after the first 10 months of 2012. But it took an unexpected turn for the worse, and went into free-fall in the last two months of the year.
The Calgary-based company, which rents large tanks used by the oil and gas industry to hold fracturing fluids and other liquids, reported dismal third-quarter financial results, reduced guidance for the year, and then suspended its monthly dividend. Amid a management shake-up, it warned it could take “significant writedowns” as it struggles to collect payments from its customers.
The Poseidon experience, which also took brokerage analysts by surprise, serves to emphasize the need to have a diversified portfolio. Says Mr. Sherlock: “Any stock can start out nice, and then turn quickly against you.”
How They Fared
David Sherlock, portfolio manager, McLean & Partners Wealth Management Ltd.
Magna International Inc.
Gail Bebee, finance author No Hype: The Straight Goods on Investing Your Money
ATS Automation Tooling Sys. Inc.
Benj Gallander, president, Contra the Heard investment newsletter
ING Groep N.V.
Brian Pinchuk, analyst, Lorne Steinberg Wealth Management Inc.
Descartes Systems Group Inc.
Robert McWhirter, president and portfolio manager, Selective Asset Management Inc.
Granite Real Estate Inc.
Jim Huang, president and portfolio manager, T.I.P. Wealth Manager Inc.
Retrocom Mid-Market REIT
Yarith Chhiv, portfolio manager, Palos Management Inc.
SPDR S&P Regional Banking ETF
Philip Pearlman, executive editor, StockTwits
iShares Russell 2000 Growth ETF
Peter Hodson, chief executive officer, 5i Research Inc., Editor, Canadian MoneySaver Magazine
Glacier Media Inc.
Tim McElvaine, president, McElvaine Investment Management Ltd.
Research in Motion Ltd.
Steven Palmer, president and chief executive officer, AlphaNorth Asset Management Inc.
Research in Motion Ltd.
Malvin Spooner, president, Sienna Capital Management Ltd.
Poseidon Concepts Corp.
Sheryl Purdy, vice-president and investment adviser, Leede Financial Markets Inc.