As the editor of our annual stock picking product, Stocks 2005, I'm known from time to time to take a bit of license regarding how responsible I am for the performance of the stock picks.
It's hard not to, when our selections for the last three years have absolutely mauled the returns of the market, as measured by the S&P 500.
To date our Stocks 2004 selections are up more than 37%, vs. an S&P return just below 14%. The companies we recommended in Stocks 2002 are up 50%, vs. the S&P 500's gain of 3.5%. And the big winner, Stocks 2003, in which we introduced subscribers to some phenomenal, little-known companies like Cemex
Let's say that in unison now: 73% in a little more than two years vs. an S&P 500 return of 31%.
As the editor, as the person who vetted all of the stocks, these returns can only bring me to one logical conclusion: I am amazing.
But lo, what's that little voice? The little people? Who? Oh, you mean the folks who found the companies and developed the investing theses and presented them in each volume? Oh, yeah, them. I guess we should give them some credit, as well.
After all, the annual Stocks issue is a compilation of great stock ideas for the year from our top stock analysts. Included in Stocks 2005 are selections from each of our stock newsletter editors, including Mathew Emmert from Income Investor, Philip Durell from Inside Value, Hidden Gems' Tom Gardner, and Rule Breakers' David Gardner, as well as a bonus exchange-traded fund selection by Champion Funds editor Shannon Zimmerman. Oh, and -- cough, cough -- this time the editor turned in an idea of his own for inclusion.
The issue comes out in early December, and we leave it on sale through early February. Well, it's early February now, so it's time to say "last call" and prepare to bring up the house lights.
Will this year's batch of companies turn in gains like we've shown over the last three years? I can't possibly say. We've had years, honestly, where our picks combined have not beaten the S&P 500, and in fact we've had one year in which the stocks we selected finished the year lower than they started.
Yeah, how's that for marketing? "Buy this! The companies in it might go up, and they might go down!" But it's true -- as much as we model, as much as our analysts crunch the numbers, read the tea leaves, and give their best shots at whether or not the companies will be higher in a year's time. It's not as easy as it may seem. We also have the occasional clunkers, companies that simply fail to perform to our expectations. That's all part of investing: Clunkers happen. But here's what we try to do each and every time this occurs:
We perform an autopsy. We ask ourselves: What did we miss? What risks did we not see, or underappreciate, or what potential for added value did we overvalue? Was our reading of management bad? Is this just something that's slower in unfolding?
I'll give you an example. In 2003 we included a profile on the nation's second-largest video chain, Hollywood Video
Ouch. What's the lesson? Well, as we've seen in telecommunications, in airlines, and in various other businesses with too much capacity chasing too few dollars, sometimes good internal fundamentals aren't sufficient to overcome the riptide. Next time through, when an analyst thought of a company in a similar business, this time a telecom, we performed a more thorough, skeptical analysis of its ability to weather such brutal competitive pressures. This time we determined that the company's price simply was not cheap enough, that there was too much optimism.
Which is not to say that our writers are so risk averse that we force each of them to find companies that specialize in rock salt or paint. In fact, in Stocks 2005 you'll find that the profiled companies include:
- A multimedia conglomerate that has endured some significant questioning of management. It has in its stable what many consider the strongest media franchise in the world.
- A company so hated by Wall Street that its shares had not budged since 1993. But we found information of a business transformation, and changes in product demands at the Defense Department mean that opportunity knocks.
- A small international plastic parts and electronic components manufacturer -- a brutally competitive business -- that offers lightning-quick capital turns and an outsized dividend to boot. We applied some of our Hollywood Video lessons here and thought the rewards outweighed the risks at current prices.
I'm always amazed that newsletters and stock-picking services guarantee big winners, every time. It doesn't work that way, it never has and it never will, not for anyone who invests in common stocks. But what we can guarantee with Stocks 2005 is that we've taken lessons we've learned in the past, from mistakes and successes, and applied them to each company that we cover. The result is a group of companies that we believe offer excellent potential for beating the market averages over the long term.
Fool on!
Bill Mann, Editor, Stocks 2005
Bill Mann owns none of the stocks mentioned in this article. He is editor of Stocks 2005 (yeah, you mentioned that...), which ison sale for a limited time.