The Best Of The Best: Our Top 5 Picks

2/17/2014


In an investment world that can be long on promises and short on results, our Focus List consistently outperforms. Below we show every year of the Focus List's results versus its benchmark, the S&P 500 Index, since we launched the portfolio on Dec. 23, 1994.

FOCUS LIST HISTORY
Since its inception on Dec. 23, 1994, our Focus List has delivered a price return of 462.1% on a fully invested basis, well ahead of the S&P 500's 296.2% gain. Including our recommended cash or fund position, the Focus List has fared even better, up 512.5%.
-- Focus List Return --
Year
Fully
Invested
(%)
With Cash/
Fund
Position
(%)
S&P 500
Index
(%)
1994 †
0.7
0.7
(0.1)
1995
30.4
30.4
34.1
1996
23.9
23.9
20.3
1997
26.6
26.6
31.0
1998
23.2
20.6
26.7
1999
22.9
19.3
19.5
2000
14.0
12.9
(10.1)
2001
(16.0)
(11.2)
(13.0)
2002
(28.9)
(24.3)
(23.4)
2003
20.2
19.1
26.4
2004
17.5
16.1
9.0
2005
8.1
7.6
3.0
2006
12.9
12.5
13.6
2007
22.8
21.5
3.5
2008
(48.8)
(38.6)
(38.5)
2009
40.0
31.8
23.5
2010
19.5
16.0
12.8
2011
(4.8)
(3.9)
0.0
2012
14.2
13.3
13.4
2013
36.0
33.0
29.6
2014 *
(1.2)
(1.3)
(1.4)
Return since
Inception *
462.1
512.5
296.2
† Inception on Dec. 23.      * Through Feb. 11.

Excluding dividends and transaction costs and on a fully invested basis, which ignores our recommended cash position, the Focus List has topped the S&P 500 in four of the past five years. Looking further back, our Focus List has delivered a total price return of 462.1% on a fully invested basis — and 512.5% considering our cash or short-term bond fund position — since its inception, well ahead of the S&P 500's 296.2% gain.

According to the independent Hulbert Financial Digest, the Focus List outperformed the S&P 500 for the one, five, 10, and 15 years ended Dec. 31. Despite its concentrated nature, the Focus List's monthly volatility has been 6% below that of the S&P 500, according to Hulbert, helping the Focus List outperform on a risk-adjusted basis for the five, 10, and 15 years ended Dec. 31.

Our Focus List generally contains our 12 to 17 best ideas for the next 12 months. But we don't always love all members of the Focus List equally. Given the list's track record, we recommend investors buy the entire portfolio, with an equal dollar amount im each stock. But for those looking to fill out an existing portfolio, start with these five stocks, our favorite picks.

Unlike the other four stocks featured today, Google ($1,190; GOOG) is not cheap, trading at 27 times trailing earnings and earning a Quadrix Value score of 31. However, it looks more reasonable based on the long-term outlook, with a PEG ratio (P/E divided by estimated five-year profit growth) of 1.2, cheaper than about 68% of U.S. stocks.

Companies eventually reach a point where it becomes difficult to move the needle and growth becomes scarce. Google's market value, in excess of $405 billion, trails only Apple ($536; AAPL) among S&P 500 stocks. Yet Google still has a wide clearance below its ceiling. The consensus expects Google to increase per-share profits 21% over the next 12 months, double the 10% average for S&P 500 technology companies.

Google is forging a lot of projects in the fire — if just one of them comes to fruition, it could open up a big new source of growth. Meanwhile, the core advertising business still has plenty of potential, and several of the world's biggest advertising firms expect ad spending to accelerate this year.  Google is a Focus List Buy and a Long-Term Buy.


Helmerich & Payne ($88; HP), featured in last week's Analysts' Choice, is expanding its fleet of high-end rigs and taking market share. In the December quarter, H&P topped consensus estimates for per-share profits and sales; revenue from land drilling grew 5% in the U.S. and 9% in international markets. Shares rallied on the report, and analysts ratcheted up earnings estimates. H&P is now projected to earn $6.07 per share in fiscal 2014 ending September, implying 8% growth, on 7% higher sales.

The stock has surged 50% since joining the Focus List in January 2013. That rally has pushed its Value score down to 74, though shares still look reasonably attractive at 15 times trailing earnings, a 10% discount to the median for S&P 1500 energy stocks. A perennial standout in Quadrix, H&P's Overall score has exceeded 95 for at least 13 straight months. H&P, yielding 2.8%, is a Focus List Buy and a Long-Term Buy.


Skyworks Solutions ($31; SWKS) has delivered at least 12% sales growth in each of the last five quarters and higher operating profit margins in four of the five. That growth has helped boost free cash flow at least 15% in five straight quarters. Skyworks' cash position is up 72% from a year ago to to $649 million, or about 11% of stock-market value. Skyworks has no debt. The stock earns the maximum rank of 100 for Quadrix Overall and both sector-specific scores. All six Quadrix category scores exceed 80.

Data volumes on U.S. wireless networks will surge to nearly eight times current levels by 2018, predicts Cisco Systems ($23; CSCO). Skyworks builds radio-frequency semiconductors to transmit that data between smartphones and other mobile devices. While demand ramps for traditional wireless gadgets, Skyworks aggressively expands into such new areas as wired homes, cars, and health-care equipment. Rising analyst estimates project 18% higher earnings per share in fiscal 2014 ending September on 11% revenue growth. Yet the stock trades at 12 times estimated earnings for the current fiscal year, 25% below the average forward P/E for S&P 500 technology stocks. Skyworks Solutions is a Focus List Buy and a Long-Term Buy.


Equipment-rental leader United Rentals ($82; URI) is leveraged to the U.S. economy, which we see improving this year. The IHS Global Insight Forecast calls for the North American rental industry's revenue to grow 8% in 2014 and 11% in 2015. United Rentals said Jan. 22 that 98% of its customers expect activity for the coming year to be the same or better than 2013.

Consensus estimates now project United Rentals will grow 2014 per-share profits 23%, up two percentage points from 90 days ago. That compares to 8% profit growth for the S&P 500 industrial sector, an estimate that has steadily fallen since October. Although capital spending could hold near last year's record level, United Rentals seems capable of generating excess cash to reduce balance-sheet leverage and also fund its plans to repurchase $450 million in shares, or about 6% of the total outstanding.

The company's improving outlook doesn't seem fully reflected in its stock price. Shares trade at 11 times estimated 2014 earnings, a 30% discount to the median for S&P 1500 industrial stocks. United Rentals, scoring above 95 for Quadrix Overall and both sector-specific ranks, is a Focus List Buy and a Long-Term Buy.


Wells Fargo ($46; WFC) has slogged through a couple quarters of sluggish growth. But its shares look cheap, and long-term prospects remain intact. The residential-mortgage business continued to decline in the December quarter, with applications down 57% year-over-year and originations down 60%. The bank expanded elsewhere, as evident by full-year 2013 net-income gains of 12% for community banking (55% of total net income), 4% for wholesale banking (36%), and 40% for the brokerage and retirement unit (8%). Wells Fargo hopes new cross-selling initiatives will deepen relationships with customers and reduce attrition.

Management sees 2014 as a year of modest improvement, a trend reflected in consensus estimates, with per-share profits projected to rise 4%. The stock has held up fairly well so far this year, with a total return of 2%, compared to a median loss of 2% for S&P 500 financials. At 12 times trailing earnings, the stock trades 31% below its sector median. It expects to boost the quarterly dividend and stock buybacks this year, with an announcement likely in March. Wells Fargo, yielding 2.6%, is a Focus List Buy and a Long-Term Buy.

OUR FOCUS LIST
Price Change
Since Added
---- To List ----
Growth, Past
- 12 Months -
Est. Growth,
Current
- Fiscal Year -
---- Trailing P/E Ratio ----
----- Quadrix Scores -----
Company (Price; Ticker)
Date Added
To List
Stock
(%)
S&P
500
(%)
EPS
(%)
Sales
(%)
EPS
(%)
Sales
(%)
Current
5-Year
Average
Sector
Median
Momen-
tum
Value
Overall
Cognizant Technology
($98; CTSH)
8/1/13
33
7
15
20
16
17
22
23
19
87
62
97
DirecTV ($71; DTV)
10/9/08
254
100
23
7
14
5
14
16
19
74
90
98
Google ($1,190; GOOG)
11/7/13
18
4
9
19
21
18
27
23
19
82
31
87
Helmerich & Payne
($88; HP)
1/10/13
50
24
20
5
8
7
15
13
17
72
74
98
J.P. Morgan Chase
($57; JPM)
2/14/13
17
20
18
(1)
6
1
10
14
14
25
93
75
Kroger ($37; KR)
5/16/13
6
10
23
6
6
7
13
12
18
73
91
91
Lear ($75; LEA)
8/1/13
8
7
1
11
26
7
13
9
19
55
93
92
Magna International
($86; MGA)
1/31/13
65
21
11
12
20
4
13
16
19
78
81
96
Qualcomm ($76; QCOM)
2/14/13
15
20
19
24
13
8
18
21
19
79
75
97
Schlumberger ($90; SLB)
10/24/13
(3)
4
16
8
20
9
19
21
17
69
79
84
Skyworks Solutions
($31; SWKS)
1/23/14
(1)
0
29
13
18
11
13
21
19
95
82
100
Union Pacific
($178; UNP)
12
5
15
7
19
16
19
78
58
95
United Rentals
($82; URI)
12/19/13
9
1
30
20
23
9
17
19
19
93
76
99
Wells Fargo ($46; WFC)
6/14/12
44
37
10
(3)
4
1
12
15
14
59
87
96
Whiting Petroleum
($58; WLL)
11/7/13
(7)
4
21
22
(2)
4
14
16
17
80
87
91
Focus List average
36
18
17
11
14
8
16
17
18
73
77
93
S&P 500 Index average
9
6
8
5
20
18
18
56
61
61
Note: Quadrix scores are percentile ranks, with 100 the best.

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