Blessed by the Potato

The other bloggers got to play a stock-picking game for 2010, so I suppose I will too! Note that this is a game with a set end-date so looking for value is not necessarily the way to go — often a shoot-the-moon approach works well in these kind of games. So bear that in mind, and don’t consider any of these as recommendations for you to actually buy!

First off, I’ve got to agree with Mike from Four Pillars and say that I’m bearish on gold. As suggested in the comments, I’ll short the bull ETF rather than long the bear one. As an aside, I very nearly bought some HBD in real life at the beginning of December, I was fairly certain that gold’s shine had reached the end. Unfortunately these commodity ETFs are highly dangerous financial instruments — even if you’re right in the end, you can be destroyed by volatility in the meantime. After giving it a long, hard think through, I doubt I’ll ever be sure enough to buy in for real.

Pick 1: Short TSE:HBU. ($22.22)

Next, I’ve read through analysis of the US mortgage insurers, Fannie and Freddie. I have a real hard time deciphering their books. More importantly, I can’t get my head around the political risk — is the government purposefully trying to drive these two entities into the ground? The terms of F&F’s bailout were much stricter than any of the banks, and in the last reporting period, Fannie had buttloads of cash on hand, which is costing them 10% to hold on to! I can’t fathom why the government is making them carry that load, rather than making the bailout a demand loan, other than to kill them. However, if the US government isn’t going to kill them off entirely, then there looks to be a good chance that the (now junior) preferred shares will have some value. I don’t know if that value will be realized by year-end, but since they’re trading for pennies on the dollar, I’ll make that my next pick.

Pick 2: Long NYSE:FRE.W (I’m not sure which series exactly to pick — I figure depth below par value is probably more meaningful than the coupon that’s not being paid. The W closed 2009 at $0.95 US)

IMRIS is a small Canadian biotech company that makes an MRI system hung from rails so it can be moved in and out during surgery (vs moving the patient in and out of the fixed MRI). They have a pretty decent order backlog as it is, and a partnership with Siemens. In addition, they’ve had some new applications recently approved. I think now that the economy is recovering (which affects hospitals and universities too), that their business will pick up and they’ll resume the parabolic growth curve for a few years, although they’re still at the money-losing stage of their development. Also, hopefully the market’s attention will return to small, speculative plays like this.

Pick 3: Long TSE:IM ($5.30)

Finally, I still like the energy sector. I’m tempted to pick XEG (an ETF of Canadian oil companies, not a commodity ETF), but I own it in real life; while I like it as an investment, I don’t think it’s going to shoot the lights out in a competition like this. So instead I’ll pick A123, a maker of batteries for electric cars, on the theory that a return to high gas prices will goose the hybrid/nascent PHEV market. Personally, I think A123 is already overhyped and I probably wouldn’t invest in it in real life at this point. Lithium ion batteries have a lot of potential, but NiMH batteries are almost as good (ok, heavier and bulkier, but cheaper too), and have decades of demonstrated real-world reliability in EVs and hybrids. For the next year or two, A123 may do well (especially if GM ever actually builds the Volt and it doesn’t suck), but I have to wonder what will happen when the Cobasys patent runs out in 2014 — will LIon become an expensive niche?

Pick 4: Long NASDAQ:AONE ($22.44 US)