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3 Ways to Beat the Market Like Me

Rick Aristotle Munarriz
June 13, 2011

Who says you can't consistently beat the market?

When Marketwatch's Peter Brimelow pointed out that Motley Fool Rule Breakers was one of the 10 best performing stock newsletters of 2009 -- according to scoreboard tracker Hulbert Financial Digest -- no one around here felt it was a fluke. As part of the analyst team David Gardner assembled to smoke out disruptive growth stocks with market-thumping potential, I knew we were onto something special.

I was right. When Brimelow wrote about us again a year later, it was because we had cracked the top 5 list of the best performers in 2010.

But this story apparently doesn't end with back-to-back years of success.

Brimelow came back with even sweeter news last week. According to Hulbert Financial Digest, our 22.3% return in a challenging 2011 through May lands us at the very top of all tracked newsletters. I'm psyched!

I'm not here to brag, though, so I apologize if my excitement comes off that way. I'm actually here to share some of the tips that I have used since the newsletter's inception in 2004 to find winning investments. If just one of my suggestions makes you a better investor, then I'll have something worth bragging about.

1. A perpetual earnings beater is your best friend
A market thumper in motion tends to stay in motion. One of the easiest paths to beating the market is to load up on stocks that are doing exactly that.

Apple (Nasdaq: AAPL  ) has been consistently beating Wall Street's guesstimates for years. It shouldn't surprise anyone to see tech's most valuable company thrive in what has been "the lost decade" for many of its peers.

Quite simply, behind every smart investor, there are a bunch of slow analysts.

Shares of Chipotle Mexican Grill (NYSE: CMG  ) have climbed 350% since I originally recommended the burrito roller to Motley Fool Rule Breakers subscribers four years ago.

Quick-service Mexican eats didn't seem like much of a growth industry at the time. The Colorado company was spun off by McDonald's (NYSE: MCD  ) of all things. However, I was immediately drawn to its bottom-line performance.

"Chipotle has blown away most Wall Street profit targets in all four quarters as a public company," I wrote in the original recommendation.

Save for a brief slip during the recession-seasoned summer of 2008, this is exactly what Chipotle has continued to do. Try on the past year for size.

  EPS Est. Diff.
Q2 2010 $1.46 $1.39 5%
Q3 2010 $1.52 $1.31 16%
Q4 2010 $1.47 $1.29 14%
Q1 2011 $1.46 $1.44 1%

Source: Yahoo! Finance.

Blowout returns are joined at the hip to blowout quarters.

2. Don't be afraid of something new
I know a lot of perfectly capable investors that sidestep IPOs. After all, there are plenty of potential pitfalls among the freshly traded:

  • There isn't any kind of track record when it comes to my first tip of consistently surpassing Wall Street expectations.
  • Some companies go public as an exit strategy.
  • Even when successful, trigger-happy debutantes come back with dilutive secondary offerings at higher price points.
  • Roughly six months after an IPO, the expiration of lock-up periods allows insiders to sell.

The shortcomings are real, but these are things that great companies can easily overcome.

I recommended shares of OpenTable (Nasdaq: OPEN  ) the month after it went public two years ago. The online dining reservations leader has gone on to nearly triple on our scorecard.

Yes, there has been plenty of insider selling at OpenTable over the past two years. Tech companies that rely on stock options for compensation will get a lot of that. OpenTable also filed for a secondary offering just four months after going public. It's still been good for a 199% return in two years, baggage and all.

You don't want to overpay. I pity the person that paid $122.70 for white-collar social networking site LinkedIn (NYSE: