The chart below summarizes the investment strategy, contrarian value in quality businesses, that I have been working on for the last five years in my roll-over IRA portfolio.

The strategy, as it has evolved over the years, has produced annualized returns of ~18 %, handily beating the S&P 500 index, which over the same period has produced annualized returns of ~10.2 %.  A dollar invested in the strategy would be worth $2.30 today compared to the $1.68, produced by investing in the SP500 index.

In particular, in 2022, the above-mentioned strategy has produced ~10.5 % annualized returns, relative to a negative 13 % return for SP500, an alpha of a whopping 23 %!

The period through the last 5 years has been, to put it mildly, a tumultuous period in capital markets. We witnessed the massive growth in FAANG stocks, saw a 20 % drawdown in the latter half of 2020, and a recession in 2020, followed by a bubble of all bubbles, with growth/story stocks, bitcoin, NFTs, SPACs, and meme-craze to the massive draw-down and cooling off of period, that followed the aggressive hawkish stance by Fed in 2022 and the yield curve inversion, which is now into deep negative territory (a historical precursor to imminent recession).

Amidst all this turmoil, how did I exactly manage to produce these returns? In this article, I will take a deep dive into my fund activity over the period of 5 years, to review decisions that produced winners, my mistakes, and the key learnings, which hopefully will allow me to continue to evolve in my journey in the art of contrarian value investing.

I am breaking down the deep dive into three parts- winners exited, losers exited, and current holdings.

The Winners- Exited

The Table below provides a summary of positions that I initiated and completely exited out of in the last 5-years

Ranger Oil Corporation (ROCC) was the only 10X bagger stock in my portfolio in the last 5 years. I bought ROCC for the Rollover account at the height of the Covid-19 pandemic lockdown. At the time, the firm was called Penn Virginia Corporation, trading under the ticker symbol PVAC. It was a classic contrarian play, on a pure-play small-cap oil and gas stock,  under extreme macro-induced distress.

Crude going to negative valuation, Exxon being booted out of DOW to be replaced by SalesForce, could not  have been strong enough contrarian signals to go big on the sector! Yets, my bet on PVAC was less than 1 % of my portfolio at the time. The subsequent 10X gains, while substantial in its own rights, was not sufficient enough to move the needle on the portfolio. To add salt to injury on wrong-sizing, I sold out too soon. The stock went on to 20X my cost-basis and is still trading at close to those levels today.

Apple was yet another classic contrarian play in late 2018, when for a very brief period markets were on sale and Apple’s service-focused pivot had not been fully developed. I was able to purchase a quality company at quite a discount to my perceived fair-value estimate. Unfortunately, though, I sold out as soon as the stock reach my fair value assessment. After I sold out of my position the stock rose another 200 %, reaching a peak value of $177! Lesson for me here is, if one has the opportunity to buy into quality businesses, run by amazing management at the helm, with a strong brand moat, do not sell out unless the stock is egregiously over-priced.

The story of ROCC and AAPL has played out pretty much consistently for all of the remaining winners above. I bought Stamps.com (STMP) when the stock tanked from upwards of $300 to $50, on the CEO call to not renew contract with their only customer, USPS. I bought Chipotle (CMG), amidst the e-coli crisis, fully aware of how the food-poisoning crisis plays out for fast-food chains in the short term (see here).

I bought Discovery when it was going through the cord-cutting crisis amidst the growth in streaming services. For a brief period, back then it seemed linear programming was facing imminent demise. Here, I was helped by my study of John Malone, the legendary CEO of TCI, and I was assuaged by the fact that Discovery was still a major holding for John Malone. My purchase of PG&E, the only utility provider to northern California, happened after it came out of bankruptcy and was immediately facing another wild fire crisis. I bought Merck (MRK) as a play on negative sentiment around the stock resulting from Pfizer coming out with a successful Covid-19 vaccine. Finally, CVS was a purchase made by me when it was on sale in the market due to the Amazon overhang and the worry at the time that Amazon would step on CVS’s core prescription pharmacy business.

Ventas Inc, (VTR) a REIT, was the only non-pure business entity that I purchased as a play on aging American population. It was out of a norm investment for me at the time and my purchase of primarily motivated by the reasonably high-dividend yield on the stock. Ventas is an outlier in another way. VTR is the only stock, other than Discovery, that is currently trading at valuation below my exit value. All of my exited positions have gone on to produce multi-bagger returns since I sold out of the position!

The Losers-Exited

The story of contrarian value play also consistently played out in my opening of positions in the stocks listed above, which I eventually sold out of at a loss. Boeing (BA) purchase for me happened after the 737-Max debacle. I bought BA as a duo-poly, with the conviction that BA was national security concern for the US government and there was no way US government would let BA fail. What I failed to analyze was the run up in stock was in part motivated by a shift in management culture (which shifted after their purchase of McDonnell Douglas in 1997) from safety first to share-holder first! The firm stopped thinking like an owner and more like a trader trying to placate Wallstreet. Once I realized my error, I did not think twice about getting out and as it turned out BA was the biggest dud in my portfolio with realized losses upwards of 35 %!

I have been an ardent Buffett fan and when Buffett initiated a position in Delta, an industry that he had abhored for a long-time, I was intrigued. As soon as first signs of Covid-19 panic started to emerge, Delta stock took a beating and I saw an opportunity to load up on stock that Buffet had a change of heart on. Alas, it was a mistake. Airline industry remains very competitive, and very much riddled with difficulties in personel management, vagaries of macro environment and oil prices and extensive capital costs. It is a business that unless one can own for less than 50 cents on dollar, would be very hard to make money consistently for a long-time period. I got out realizing my error in analyzing airlines business.

If you have been to a mall, you know Victoria Secret. If you are married you know Victoria Secret. It has a brand name that is all too-familiar. That was the charm for me to own L-Brands (LB), the owner of Victoria Secret brand, when it was offered on sale because apparently tastes had changed and the image of a slim beautiful body to desire was no longer considered cool!

As soon as pandemic hit, and the country went on a lockdown, correlations in the entire stock market went to 1. I saw so many opportunities to own quality businesses that I decided to take losses in sub-par value plays in my portfolio (or so I thought, I truly believed the hey-day for Victoria Secret was over). I sold out of Newell Brands (owner of popular brands such as Graco and Rubbermaid) and L-Brands, to make room for adding to my quality holdings in the portfolio, such as BRK-B

Current Holdings