Upon opening one of my online portfolios, I see these beautiful numbers:
- Intuitive Surgical (Nasdaq: ISRG): Up 1,572%
- Cognizant Technology Solutions (Nasdaq: CTSH): Up 222%
- Shutterfly: Up 99%
- Nuance Communications (Nasdaq: NUAN): Up 70%
- Terex (NYSE: TEX): Up 32%
Alas, those aren't my actual returns. They're the returns I could have had if I'd bought these stocks, instead of simply entering them on my personal watch list.
Main attractions
These companies drew my attention for different reasons. Intuitive Surgical is at the forefront of robotic surgery, making expensive machines for hospitals and supplying training and accessories. It has been growing briskly, and its technology's high switching costs give the company a huge advantage -- it would be a big deal for a hospital to opt out or change machines.
Cognizant Technology is a U.S.-based company in the outsourcing and consulting businesses, both of which sport high profit margins. Shutterfly, the online photography company, seemed like it might be good acquisition bait for the right buyer.
Nuance Communications is a speech-recognition and imaging software company growing both organically and via acquisition. It's developing technologies to enhance communications on smartphones and other proliferating mobile devices. Terex makes heavy equipment such as cranes, and it stands to benefit when our global economic cloud lifts.
Good calls, bad calls
Although I lost out on the gains above, I didn't necessarily do wrong. The attractive points above still don't provide a solid basis for a purchase decision. Buying Shutterfly just because it might get bought out for a higher price would have been unwise. (After more than two years on my list, Shutterfly's still waiting for a suitor to materialize.) When companies are growing briskly, as Intuitive Surgical, Cognizant, and Nuance have done, their prices can get pushed far above bargain territory.
Seeking stock bargains is critical to investing success. Your watch list will serve you best as a reminder of companies you want to follow. As I learned more about Intuitive Surgical (after first hearing about it in our Motley Fool Rule Breakers newsletter), I became more convinced that it was a good buy. I did eventually buy some shares, and although I don't have a 1,572% return, I've still more than tripled my money.
A useful tool
A watch list can be a great tool, provided you build it right and use it regularly. Collecting companies that interest you in an online portfolio is a smart way to start. You can enter each company at its current price, then check back to see whether it's gotten even cheaper. Better still, if you can come up with an estimate of the stock's intrinsic value, enter that as your purchase price. Then you'll immediately be able to see how far above or below that price the stock currently is.
Right now, for example, a glance at my watch list shows me these companies that are down sharply from when I first noticed them:
- Jacobs Engineering (NYSE: JEC): Down 56%
- Boston Scientific (NYSE: BSX): Down 63%
- Valero Energy (NYSE: VLO): Down 74%
This doesn't mean they're necessarily bargains, but it does pique my interest in further research. Jacobs Engineering is a global construction company that got whacked by the economic environment. It's likely to benefit from the eventual recovery, and some mutual funds are already piling in. Boston Scientific has been struggling lately amid recalls and restructuring. We shouldn't write it off, but at this point, there are less uncertain stocks that I'd rather consider. Finally, Valero Energy might seem distasteful as an oil refiner in a post-Gulf-spill world, but the world has far from erased its dependence on oil. For now, I'll keep Valero on my watch list.
While it's great to maintain a watch list with many different stocks, you only want to invest in your best ideas. That might be your best dozen or your best 20 -- but if you find yourself putting money in your 59th-best idea, ask yourself why you're not just adding to the positions in which you have even more faith.
Build a watch list, and use it wisely. Even if you miss out on a 1,572% gain, you might still enjoy a 100% or 200% return.
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