Which of These Stocks Is Not Like the Others?

So, along with a group of financial newsletter legends like Mark Hulbert and Louis Navellier, not to mention a few thousand good folks like you, I was invited to enter MarketWatch's Virtual Stock Exchange competition. It's basically a stock-picking bout that will last two months, and the person standing at the top of the total return pile in the end wins.

Now, given that I'm a proponent of long-term investing via dividend-paying stocks, you might be wondering just what in the hula hoops I'm doing in this competition.

That's a good question -- one I've asked myself several times since I agreed to enter this contest. The truth is, my long-term strategy of buying dividend payers probably has about a snowball's chance in Hades of pulling off a win in this short-term competition, yet I've still entered to promote the art of dividend investing.

To the moon, Alice!
Of course, the way to win such contests is to pick a stock that has the potential to either launch to the moon or head straight through the floor on any given day -- and then hope it takes the moon route. It's that simple. In other words, we're not talking about low-beta beauties here (i.e., beta is a measure of volatility).

Yet, I'm not going to take that approach. Say huh? Have I lost my mind? Debatable, but let me share an interesting bit of news with you. When my friend and fellow newsletter advisor Robert Brokamp learned I would be participating in this competition, he sent me a fascinating article from CNNMoney. The piece described how finance professor Moshe Milevsky had won Canada's best-known stock-picking contest three years running by following the strategy I just described. Investors were allowed to pick one stock, and they had to hold that company for the duration of the tournament. In the most recent competition, Milevsky's stock treated readers to a 117% gain. But what's really interesting is what most of these picks do after the competition clock stops ticking. For instance, the same pick that surged 117% fell back to even just four days after the competition ended. So if you didn't buy at the opening of the contest and sell at its close, how much money did you make? Not very much. Milevsky sums it up better than most by saying, "Stocks like these can go up more than 100% very quickly, but they also offer about a fifty-fifty chance of losing you 95% of your money."

Frankly, that's not investing -- it's gambling. And investors don't discover this until it's too late. No one is going to stand over your shoulder and tell you when to sell these potential train wrecks.

Slow and steady will make you rich
I'm not interested in making money for my readers next week and losing it for them next month. The best dividend-paying stocks have a tendency to beat the market over time while exposing you to less volatility and lower business risk. That's what I'm here to tell you, and if it's the only thing I accomplish during this two-month contest besides embarrassing myself, I can live with that. I want you to have stocks in your portfolio that will make you money over your lifetime, not over the lifetime of your Chevy Blazer.

Though I'd like to think there are plenty of stocks among my Motley Fool Income Investor recommendations with the potential for large gains, no one can say exactly when they'll achieve them. Certainly some already have, but others may take years. And the crystal ball of a newsletter advisor is really no clearer than yours. That's why short-term investing is such a crapshoot.

The portfolio
Because I believe this approach is the one that will pay off for investors not just over the next two months but over the next 200, I'm here to throw my darts into the mix.

Here are the three companies I've selected from among our Income Investor holdings to represent my opening portfolio -- and perhaps my final portfolio. I will caution you that this group is composed of picks that are quite a bit more volatile than my typical recommendation, which makes them ideal for this competition. In short, please don't read anything into these selections other than that they're good choices for this exercise.

First we have Annaly Mortgage Management (NYSE: NLY  ) , which is largely a pure play on mortgage-backed securities and the interest-rate changes that drive them. I, like most others, believe the Fed's rate hikes are nearing an end. Given that we've already experienced 16 consecutive increases, mortgage prepayment rates are slowing dramatically and will likely continue to do so. Because a steeper yield curve and lower prepayments are both good things for mortgage real estate investment trusts (REITS), and I believe Annaly is well positioned to take advantage of these improving market conditions, it makes the portfolio.

If Equity Office Properties (NYSE: EOP  ) is the kingpin of the office REITs, American Financial Realty (NYSE: AFR  ) is the kingpin of the banking office REITs. Actually, it's the only REIT in the sector that focuses exclusively on the financial industry. American Financial is basically working hard to become the landlord of choice in the banking, brokerage, and insurance sectors. However, the market remains unconvinced that the management is solid enough to pull this off, and there are doubts about the company's dividend -- which is why the shares now offer a 10.4% yield. Though I appear to be alone on this, I believe the company will maintain the dividend and that operating cash flow from the company's core real estate portfolio will fully cover the payout by the end of 2007 (management says by early 2007). In the meantime, it should generate enough cash from the sale of non-core properties to fund the dividend. If that proves accurate, American Financial shareholders could be well rewarded for the added risk they're taking.

Popular (Nasdaq: BPOP  ) is the largest bank in Puerto Rico, and it has exposure to the largest Hispanic markets in the United States as well. The stock has been hurt by the announcement of accounting improprieties by some of Popular's competitors. But no such shenanigans have been announced by Popular itself, and I don't believe they will be. Popular is a well-managed financial institution experiencing some weakness in its core market. With a beaten-down stock and tremendous long-term growth potential via its U.S. expansion routes, I like the company and its 3% dividend yield.

So these three firms will represent my opening portfolio. During the competition, I plan to offer weekly updates and general dividend-loving commentary. Wish me luck!

Click here to learn more about Mathew's service and his dividend-investing strategy -- currently beating the market by more than four percentage points.

Annaly Mortgage, American Financial, and Popular are Income Investor recommendations. Mathew Emmert has owned shares in both Annaly and American Financial for several years. The Fool has adisclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 503743, ~/Articles/ArticleHandler.aspx, 7/28/2014 7:31:10 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement