December 29, 2011 at 10:51 AM EST
Charles Sizemore’s Best, Worst Trades of 2011
Sin stocks -- dealing tobacco and alcohol -- were the story of success in 2011. Research In Motion, on the other hand ...

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

2011 was a particularly good year for one of my favorite Sizemore Investment Letter themes: “Money-Minting Sin Stocks.” Though I’ve resisted the urge to drink heavily or take up smoking as a means of coping with 2011’s volatility, it appears that plenty of others haven’t. Jim Beam (NYSE:BEAM) is up a respectable 8% since I recommended it two months ago, and Diageo (NYSE:DEO) is up nearly 16% year-to-date — despite being domiciled in Europe. Including dividends, Diageo has outperformed the S&P 500 by nearly 20 percentage points.

The numbers on our tobacco investments are even better. Not including dividends, Altria (NYSE:MO) and Philip Morris International (NYSE:PM) are up 21% and 35%, respectively, and both are at new 52-week highs. Dividends add another 5% to the returns of each. Again, this compares to an S&P 500 that is flat for the year at time of writing.

My best pick of the year, ironically, was a financial stock of sorts — credit-card giant Visa (NYSE:V), the winner of InvestorPlace’s “10 Best Stocks for 2011” contest. At time of writing, Visa was up a full 46% for the year, not including dividends. (Read about my follow-up pick for 2012, and check out the rest of the “10 Best Stocks for 2012”).

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).

RIMM is down 51% from my recommendation price at time of writing. 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 two weeks. In the latest of a long string of disappointments, management announced that its new line of BlackBerry 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% in one day. But given that the company trades for just four times already-revised-downward earnings and trades for 0.33 times sales and 0.68 times book value, 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% 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.

Accountability at InvestorPlace.com

From InvestorPlace Editor Jeff Reeves, whose own review of 2011′s hits and misses can be found here:

“In the new year, I hope to continue some regular disclosures from all our InvestorPlace columnists as a way to show that we are giving recommendations in good faith and that we are not afraid to own up to our mistakes.

If you have any comments to share with our writers or have ideas on how we can best achieve some form of transparency, please send your thoughts to me at editor@investorplace.com.

We are a site run by investors, for investors, and we are in this together. It’s very important to me that all readers can trust our commentary — so please don’t hesitate to drop us a line.”

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new special report: “Top 5 Contrarian Stocks for 2012.”


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