Taking Stock Of 2014

1/5/2015


Q The financial press keeps proclaiming the demise of stock pickers. What gives?

A Actively managed mutual funds have been derided in recent years — and with good reason. Not since 2009 have more than half of active large-cap stock funds topped their respective benchmarks, according to Lipper. Through November, just 15% of active managers for large-cap stock funds were ahead of their benchmarks for 2014, on pace for possibly the lowest rate in 30 years.

Q So 2014 was a miserable year for stock pickers, yet you guys topped the S&P 500 by a wide margin. How did you do it?

BUY LIST RETURNS
Year
Focus
List
(%)
Buy
List
(%)
L-T
Buy
List
(%)
S&P
500
Index
(%)
Since 2003 *
235.7
284.6
203.4
136.4
2014 *
25.2
22.9
21.9
12.6
2013
36.0
42.8
42.7
29.6
2012
14.2
16.0
15.8
13.4
2011
(4.8)
(9.1)
(4.2)
0.0
2010
19.5
12.7
10.3
12.8
2009
40.0
37.6
30.6
23.5
2008
(48.8)
(46.3)
(36.5)
(38.5)
2007
22.8
19.2
10.8
3.5
2006
12.9
16.9
9.7
13.6
2005
8.1
13.2
4.1
3.0
2004
17.5
22.4
9.0
9.0
2003
20.2
29.2
24.6
26.4
* As of Dec. 30.     Returns assume fully invested portfolios, excluding dividends and transaction costs.

A As shown in the nearby table, our Focus, Buy, and Long-Term Buy lists exceeded the S&P 500 by more than nine percentage points through Dec. 30. In fact, all three of our recommended lists have topped the S&P 500 for three years in a row. These returns assume fully invested portfolios and exclude dividends and transaction costs.

Our results benefited from our growth-at-a-good-price approach, as stocks with high Quadrix® Overall scores and and low PEG (P/E to growth rate) ratios outperformed. Some specific moves we got right in the past year include the following:

• Reflecting our expectation of continued economic expansion in the U.S., we steadily added several cyclical stocks, including Packaging Corp. of America ($79; PKG) and Jones Lang LaSalle ($153; JLL).

• Transportation stocks scored particularly well in Quadrix, and we did well recommending such high-scoring names as Alaska Air ($60; ALK), Norfolk Southern ($111; NSC), Southwest Airlines ($42; LUV), and Union Pacific ($120; UNP).

• We also benefited from our exposure to more cyclical technology stocks, most of which were cheap considering their operating momentum. Skyworks Solutions ($73; SWKS), up more than 150% on the year, was the big winner. We also benefited from gains in Lam Research ($80; LRCX) and SanDisk ($100; SNDK).

• We put UGI ($39; UGI) on the Long-Term Buy List in February and the Buy List in March; the last time a utility stock appeared on either list was in 2010. The timing was fortuitous, considering the S&P 500 utility sector returned nearly 30% in 2014 to rank first among the index's 10 sectors. During the period we recommended UGI, its shares outperformed the S&P 500 utility sector.

Q What could you have done better?

A Even for investors enjoying strong year, the stock market can be remarkably humbling.

• Not all of our cyclical bets have paid off, as frustrated shareholders of Manpower ($69; MAN) can attest. Manpower is a staffing company that draws the majority of its revenue from Europe, and we jumped too early into the region's sluggishly improving labor market.

• We started scaling back on our exposure to the energy sector in August, selling both Continental Resources ($38; CLR) and Helmerich & Payne ($67; HP). In retrospect, we should have been quicker to drop even more of our energy stocks, especially as oil prices began to collapse in September.

• Apple ($113; AAPL), with a total return of more than 44% on the year, was a member of our Buy and Long-Term Buy lists throughout 2014. But we dropped the stock from the Focus List in the Feb. 3 issue, a move that was ultimately incorrect. Acknowledging our mistake, we added Apple back to the Focus List in the Aug. 25 issue.

Q Why should I believe that you guys can outperform again?

A A good track record does not guarantee future success. However, discipline and humility go a long way in this business. We're not going to rest on our laurels, and we're not going to begin thinking we are especially insightful. We're going to keep working our Quadrix-driven approach and relentlessly focus on owning our favorite 30 to 40 U.S. stocks.

Moreover, our process is working, as the Quadrix Overall score continues to be effective. It may sound obvious, but people tend to want assets that are in short supply. As the story on page 1 shows, stocks with cheap valuations and solid growth are becoming scarce. While that could make finding new ideas more difficult, we think it bodes well for our current recommendations. We plan to raise our cash position when we can no longer find attractively valued growers. But, for now, good stocks are still available.

 


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