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Double Down on Top Stocks

By Todd Wenning - Updated Nov 11, 2016 at 4:54PM

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When the market gives you an inch, take a foot.

As consumers, we want to get the most "bang for our buck." To do so, we scour Consumer Reports and online reviews to ensure we get the best product for our hard-earned money.

As investors, we seek the same attributes in the stocks we buy -- we want the best-performing stocks for the right price. Unfortunately, gauging the future performance and the right price of a company's stock isn't as cut-and-dried as, say, figuring out which dishwasher is the most energy-efficient.

A recent report from BusinessWeek attempted to solve at least one half of that puzzle by determining the 50 best-performing companies from the S&P 500.

The cream of the crop
The 50 top companies consist of names you would have likely guessed, such as Starbucks (NASDAQ:SBUX) and Coach (NYSE:COH). Others included in the survey, such as IMS Health (NYSE:RX) and Barr Pharmaceuticals (NYSE:BRL), may have come as a surprise to those unfamiliar with health-care companies.

These names weren't drawn out of a hat, either. Among other things, the BusinessWeek survey judged the companies using average return on capital and growth over the past 36 months. It then compared the scores with peers to decide the top guns of each industry.

In other words, they highlighted the companies that create superior shareholder value in high-growth industries. Though this equation seems obvious, investors too often ignore it and instead bet the house on the wrong stocks.

Not everyone is smiling
What's notable is that, despite their inclusion in this exclusive list, many of the top 50 companies have been punished quite substantially by the market in recent months. Among them:

Company

% Below 52-Week High

Google

61%

PNC Financial Services (NYSE:PNC)

41%

Rockwell Collins (NYSE:COL)

56%

Abercrombie & Fitch (NYSE:ANF)

77%

Some of these drops have been pretty substantial in straight dollar terms. For example, Google has lost more than $100 billion in market capitalization since last November.

The biggest thing that's changed about Google since its drop hasn't been the company itself, but rather the economic factors that may slow ad sales in the near term. But while Google may not be able to sustain 67% annualized EPS growth -- as it has over the past five years -- over the longer term, it's still the dominant player in the powerful market of online search advertising. The market will eventually come around, and this could end up being a great time to pick up shares of this beaten-down behemoth.

Greatness counts for something
The market's recent volatility has created some tremendous buying opportunities for investors with a long-term perspective. Not all of the companies on the BusinessWeek survey are strong buys, per se, but on the whole, they appear to be:

  1. Built to last for the long term.
  2. Dominating growing industries.
  3. Helmed by committed and proven management teams.
  4. Governed by the highest corporate values.
  5. Consistently increasing shareholder value.

So, it didn't surprise me that 10 of the 50 stocks on the BusinessWeek list are active recommendations of our Motley Fool Stock Advisor service. After all, these are exactly the kind of companies that Motley Fool co-founders Tom and David Gardner look for when recommending stocks to subscribers each month.

And then you double down
Most importantly, neither Tom nor David is afraid to double down on great stocks the market has unfairly punished. One example is David's re-recommendation of Netflix in January 2005, following significant losses from the original pick. At the time, David noted:

We're currently sitting on a 23% loss. ... But I am a Netflix believer and was in there as a buyer myself in November. I think this is one cheap stock at $11, backed by a great management team that's going to create value for us going forward.

That bet paid off: Netflix is up 93% since the rerecommendation, despite the recent market volatility.

Taken together, Stock Advisor recommendations are outpacing the market by 25 percentage points since inception in 2002. If you'd like to learn more about the Stock Advisor service, a 30-day free trial is on us. To take advantage of the offer, click here.

This article was first published May 3, 2008. It has been updated.

Todd Wenning speaks softly and carries big stocks. He does not, however, own shares of any company mentioned. Starbucks is a Motley Fool Inside Value selection. Google is a Rule Breakers pick. Netflix, Starbucks, and Coach are Stock Advisor picks. The Fool owns shares of Starbucks. The Fool's disclosure policy is long, but distinguished.

None

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Stocks Mentioned

Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$86.26 (1.68%) $1.42
The PNC Financial Services Group, Inc. Stock Quote
The PNC Financial Services Group, Inc.
PNC
$169.99 (2.45%) $4.07
Tapestry, Inc. Stock Quote
Tapestry, Inc.
TPR
$34.37 (3.24%) $1.08
Abercrombie & Fitch Co. Stock Quote
Abercrombie & Fitch Co.
ANF
$18.95 (5.45%) $0.98
Rockwell Collins, Inc. Stock Quote
Rockwell Collins, Inc.
COL
IMS Health Holdings, Inc. Stock Quote
IMS Health Holdings, Inc.
RX
Teva Branded Pharmaceutical Products R&D, Inc. Stock Quote
Teva Branded Pharmaceutical Products R&D, Inc.
BRL.DL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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