Beaten up while beating the market

• No new trades.

Strategy Lab is MSN Money's stock-picking challenge. To learn more about the game -- and the contenders -- click here.

The fourth quarter wasn't kind to most segments of the market, but it was particularly unkind to the value segment. The last two weeks of 2007 and the first two weeks of 2008 were especially unkind, and my meager return for this Strategy Lab round slipped into negative territory.

Some would argue that in relative terms, the portfolio outperformed the broad market as represented by the S&P 500 ($INX). But in my mind, that's a hollow victory. In the real world, beating this market still translates into a loss. And I don't like to take losses, period.

Banks are worth holding

The die was cast on the two financials in my Lab portfolio, Associated Banc-Corp (ASBC, news, msgs) and Bank of America (BAC, news, msgs), early in the round. From the e-mail I have received, it is clear that many question my decision to hold on to those positions in light of the turmoil in that space. In simple terms, those are two great companies that continue to meet the criteria for what IQ Trends calls "select blue chips," and in due time both will rebound and will prosper.

Their earnings will obviously suffer in the short term, but their underlying value, their dividends, are intact and are not in danger. Fundamentally, nothing has changed with these companies. In fact, both are classic values in the Benjamin Graham tradition, as both are trading close to book value and their price-to-earnings ratios are at 11 and 9, respectively. For the value investor seeking high dividend yields, I would buy both companies and forget about them.

The rest of the portfolio

Jack Henry (JKHY, news, msgs) is down temporarily because of what I view as shortsighted "analysisitus," a condition that affects sell-side analysts on The Street. Jack Henry does provide the backbone technology to the back-office in the banking sector, but whatever ills may be affecting the banks currently, none of them can afford to fall behind on technology and infrastructure. That makes this is a classic value opportunity.

Automatic Data Processing (ADP, news, msgs) is perplexing; all this company does is make money and grow its dividend. With many convinced that we are in recession or soon will be, however, the conventional wisdom is that ADP's revenues will decline. Welcome to bear-market psychology.

My collection of big blue chips -- Colgate (CL, news, msgs), Coca-Cola (KO, news, msgs), PepsiCo (PEP, news, msgs), Johnson & Johnson (JNJ, news, msgs) and McDonald's (MCD, news, msgs) -- were my defensive stalwarts and performed as they always do: better than most stocks. Pepsi, Johnson & Johnson and McDonald's are still good buys.

Sigma-Aldrich (SIAL, news, msgs) is one of the best run companies you will ever find. Why its doesn't get more attention escapes me, but I just love this outfit.

There isn't much to say about Barrick Gold (ABX, news, msgs) except that the stock has been a great hedge for the current times. If we get any correction in the price of gold, this still might be a worthwhile position to consider.

My biggest disappointment was LSI Industries (LYTS, news, msgs). This company was truly the victim of shortsighted sell-side analysis. Do yourself a favor and go look at its LED technology and who it has contracts with. Then take a look at the energy bill that was signed into law recently and note that incandescent light bulbs are being phased out in favor of LEDs and halogens. At 1.5 times book value, a P/E of 8 and a dividend yield over 5%, this is as close to a no-brainer you will find.

Thanks to all of you that were kind, or not, with your communications. I look forward to parrying with you again in the next round.