Stocks 2004: 11 Picks, 11 Winners

As the editor of our annual stock-picking product, I tend to take a great deal of pride in the ongoing performance of these selections. Although this product comes out at the end of the year, our analysts begin their selection screening as far back as the summer. On several occasions we've had perfectly serviceable selection reports completed, only to have a stock run up to a price where we're no longer comfortable recommending it, so we've had to scrap it. This is the tyranny of long lead-time print products. Out with the old, in with the new. And speaking of the new, Stocks 2005 is on sale right now!

There is, of course, a second tyranny involved: When you're making picks for a year, then there is an expectation at the end of the year that you have to present a performance, a report card, if you will. This, of course, is insane. Even the most stalwart companies can move 50% or more in either direction in a year, and what happens in exactly 12 months, even for the strongest of selections, is a bit of a crapshoot. Once they're in, you can't sell them. Many times have we highlighted companies, watched them skyrocket early in the year, only to be back where they started when the time comes for our annual report card -- or worse.

Let's take Chico's (NYSE: CHS) as an example. When we issued our report last year, this fashion retailer traded at $37.49. Almost immediately after we published, Chico's stock absolutely tanked, dropping more than 20%. Then it suddenly rebounded, trading well above $45 per share for much of the time between March and August. Then, in September, disaster struck, as the company turned in poor same-store sales comparables, caused by a loss of business during the awful Florida hurricane seasons. We often pooh-pooh companies when they blame bad results on weather, but in this case, we didn't. Chico's has a large concentration of stores in Florida. Even if we gave Chico's a pass for this problem, the market did not, crushing its stock by more than -- once again -- 20%.

Company shares have since climbed back higher, closing yesterday at $42.53, for an annual gain of 13.4%. Had this been a six-month product, our results on this one company would have towered over those of the Standard & Poor's 500. Were it a nine-month holding period, Chico's would have trailed badly. But it wasn't. We counted all 365 days, and the end result was a market-beating return.

Was it luck, though? Certainly from a timing standpoint, you would have to say that there was an element of luck involved. But our goal when we make these selections is to provide companies that will beat the market over the long term. So our best line of defense against loss is to focus intently on the price at which we buy. It's impossible to gauge where a company will be priced one year hence, but it sure as heck helps if you're buying dollars at $0.60 apiece. Wall Street isn't known for leaving money out for free takin', after all.

All of this is a lead-in for what is simply amazing: Of the 11 stocks our analysts selected for Stocks 2004, all of them are higher today than they were on the day we published a year ago. The worst performer, drug maker Cephalon (Nasdaq: CEPH), is 1.2% higher, while the best performer of the bunch, body armor manufacturer DHB Industries (AMEX: DHB), has soared 164%. All the other selections lie somewhere in between. Incidentally, so does the S&P 500, which has risen 12.1% in the last 12 months.

Total return for Stocks 2004? 36.7%. Here's something else that is astounding about the class of 2004 -- of the 11 companies, nine of them increased more than the S&P 500, with only Cephalon and Garmin (Nasdaq: GRMN), at a gain of 9.1%, having trailed the market average. Peter Lynch has famously said that he would be happy to be right 60% of the time, as such an achievement would nearly guarantee investment success. How do you suppose he would feel about 82%, with the 18% having gone down? These businesses come from all corners of industry -- death-care provider Alderwoods Group (Nasdaq: AWGI), Internet search and marketing company Findwhat.com (Nasdaq: FWHT), even Slurpee purveyor (and bona fide turnaround success) 7-Eleven (NYSE: SE).

We have another class of selections coming up for Stocks 2005. I'll make the same guarantee that I made last year: At least one of them will fail to best the market averages over the course of that almighty, arbitrary 365-day period upon which the selections will be judged. In fact, several of them might. But I can also guarantee that our analysts scoured the stock market to find companies that offer, in their estimation, a far better than average chance of long-term outperformance.

It worked in 2004. As you'll see soon, we've gone back and calculated the longer-term returns for years past, and the results may surprise you.

Bill Mann owns none of the companies mentioned in this story. He is the editor of Stocks 2005, which is now available. Act today and receive Stocks 2005 online before it even ships to the printer.