Contrary to urban legend, winning stock ideas don't appear fully formed to Fool co-founder David Gardner in his dreams, nor does he instantly make successful purchases on the ticker symbols that appear in his alphabet soup. No, in order to achieve his market-stomping results, David makes the most of his watchlist, just like all smart investors should.
His watchlist is more robust than the average investor's, with more than 100 names, and it pulls together thinking from a broad range of sources. David added Quest Diagnostics (NYSE: DGX ) after reading an article that made the case for the health-services company. According to a recent article about the business, 95% of the 555 Motley Fool CAPS members who have rated Quest believe the stock will outperform the S&P. The article praised the company's competitive position -- the field is essentially a duopoly with Lab Corp. -- and noted that the demographics of an aging population will lead to greater demand for clinical testing.
As David says, "I can't watch every ticker out there, so My Watchlist helps narrow my focus. And after you watch a stock for a while, you'll be positioned to make better decisions."
Roughly six months ago, David added Financial Engines (Nasdaq: FNGN ) to his watchlist in the wake of the company's successful IPO. With a surprisingly quick break out of the gate, Nobel Laureate Bill Sharpe's independent investment company, which helps users kick-start their retirement, showed promise. After hitting a peak near $19 shortly after its public launch, Financial Engines now hovers in the $14 range. The business is neither a fast-growing giant nor particularly sexy. But there might be an upside for the company as a source for second opinions, as people increase their focus on their retirement plans. "I'm usually not one to buy at a company's IPO," David says. "I like to wait out that initial flurry of activity and get a sense of how it's going to perform over time. I'm keeping an eye on this one."
When David sells a stock, he'll often add it to his watchlist to see how it performs after he lets it go from his portfolio. "I use My Watchlist there so I can learn from whether or not that was a smart sell," he says. "Many people sell and it's gone from their consciousness. They don't pay any further attention to it and forget all about it. I try to learn something from my decisions. And who knows, maybe someday it'll look attractive again."
David put Value Line (Nasdaq: VALU ) on his watchlist after he sold it from Stock Advisor, just to keep up with what's happening to the troubled company. The publishing and investment-management firm agreed a year ago to settle allegations of insider shenanigans (more than $24 million in bogus commissions on phantom mutual fund trades) and has seen its share price plummet. If the company's troubles are behind it, Value Line could present a turnaround opportunity. David's certainly not betting on that -- it remains on his watchlist more out of curiosity than anything else.
And a good watchlist can definitely make you money. David started watching MercadoLibre (Nasdaq: MELI ) in October 2007, after hearing about the Latin American online retail king from a friend. After watching it for a year, he heard about it again from Fool colleague Rick Munarriz and agreed it was time to buy, adding it to his Rule Breakers service. Since then, it's become a four-bagger in less than two years. And with MercadoLibre holding strong to its spot as the leader in e-tail operations in Central and South America, a region enjoying an economic resurgence, it might be worth watching for greater gains ahead.
You can help yourself make smarter investing decisions with your own version of My Watchlist, new and free from the Fool. Click here to start building yours, or click below to start following one of the four stocks mentioned above: