It's easy to build the perfect portfolio. Here, let me show you how.

  • Cover your market cap bases with a mix of small-, mid- and megacap companies.
  • Spread your exposure across various sectors, such as information technology, consumer staples, and health care, for example.
  • Identify the companies that you expect to deliver solid investment results in the near- and long-term future.
  • Finally, trounce the return of the S&P 500 index.

Using this stock-picking framework I've identified a nice mix of high-quality companies. Investments like TriQuint Semiconductor (NASDAQ:TQNT), Pfizer (NYSE:PFE), Oracle (NASDAQ:ORCL), Dr Pepper Snapple (NYSE:DPS), and McDonald's (NYSE:MCD) have all the makings of a market-beating portfolio.

So, how'd I do?
It appears that a touchdown dance is in order: This five-pick portfolio is up 53.57% over the past 12 months, handily beating the S&P 500's 26.40% return during the same period.

Company

1-Year Return

Return vs. S&P

TriQuint Semiconductor

+138.84%

+112.44%

Pfizer

+16.85%

-9.55%

Oracle

+29.90%

+3.50%

Dr Pepper Snapple

+79.61%

+53.21%

McDonald's

+2.69%

-23.71%

I'm five for five in generating positive returns, with three out of five of my stocks beating the S&P. Booyah!

Hey, I'm the next Warren Buffett ...
Before I send my resume to Berkshire Hathaway (NYSE:BRK-B), I should probably see how my picks fared against their market cap peers.

The comparison is easy to do with the Motley Fool Stocks360 performance analysis tool. The results? Let's take a look:

Company

1-Year Return

Market Cap

Market Cap Average

Difference

TriQuint Semiconductor

+138.84%

Small Cap

+78.12%

+60.72%

Pfizer

+16.85%

Mega Cap

+45.38%

-28.53%

Oracle

+29.90%

Mega Cap

+45.38%

-15.38%

Dr Pepper Snapple

+79.61%

Mid Cap

+67.89%

+11.72%

McDonald's

+2.69%

Mega Cap

+45.38%

-42.69%

Oof.

... or maybe not
TriQuint Semiconductor outperformed its small-cap peers and Dr Pepper Snapple outperformed its mid-cap peers. The rest of the stocks in my market-beating portfolio (a-hem) lost to their market cap peers by more than 15 percentage points.

Still, comparing my stocks' performance against the broad measuring stick of market cap is only part of the story. So to narrow things down, let's pit each of my stocks against its sector peers and see how they fared over the past year.

Company

1-Year Return

Sector

Sector Average

Difference

TriQuint Semiconductor

+138.84%

Information Technology

+88.02%

+95.54

Pfizer

+16.85%

Health Care

+80.68

-63.83

Oracle

+29.90%

Information Technology

+88.02%

-58.12

Dr Pepper Snapple

+79.61%

Consumer Staples

+88.80%

-9.19

McDonald's

+2.69%

Hotels, Restaurants, Leisure

+60.64%

-57.95

Is there a doctor in the house? Suddenly my S&P-trouncing returns are looking rather sickly. TriQuint is again a winner, but every other investment in my portfolio underperformed against its sector peers by a large amount.

Clearly I missed something in my analysis. But the 145,000-plus investors in the Motley Fool CAPS stock-picking community didn't. They nailed it: Only TriQuint earned a five-star rating, with 97% of the CAPS community members who rated it picking it to outperform the S&P.

Company

CAPS Rating (out of 5)

% of Members Rating Outperform

TriQuint Semiconductor

*****

97%

Pfizer

****

90%

Oracle

****

93%

Dr Pepper Snapple

****

93%

McDonald's

****

94%

Stop looking at your stocks in isolation
Despite the humbling results of this exercise, running my portfolio through the Motley Fool Stocks360 tool has reinforced one of the most important rules of successful investing: Understand how your stocks stack up against their peer groups. Without this type of "360-degree analysis," you're likely to be better off in index funds. You just don't know it.

As the Stocks360 analysis suggests, I might explore various forms of sector and market cap ETFs such as SPDR (NYSE:SPY) as potential alternatives to my individual stock positions.

The bottom line: If I don't have solid research to justify why I think my stocks will outperform their market cap and sector peers moving forward, perhaps there are better stocks for my portfolio than the ones I'm holding now.

Find out if your stocks stink, too
The moral of this story is that answering these two deceptively simple questions can significantly improve your stock-picking skills:

  1. How should I evaluate the recent performance of the stocks in my portfolio?
  2. How should I look at the future return expectations for these stocks?

For help answering these critical questions -- and a hand evaluating the stocks you hold -- use the completely free(!) Motley Fool Stocks 360 program. Get forward- and backward-looking performance analysis for each company you hold in your portfolio. Just enter in your stock tickers to see the type of analysis we performed in this article and much more. Get started now.

John Keeling owns shares of Pfizer but no other companies mentioned in this article. The Fool owns shares of Berkshire, which is a recommendation of Stock Advisor and of Inside Value. Pfizer is also an Inside Value pick. The Fool has a disclosure policy.