Don't Fear Stocks' Success

10/19/2015


No matter how well our Focus List performs, no matter how often we outgain our benchmark, subscribers keep asking variants of the same question. "Acme Widgets has risen 50% (or hit new all-time highs) since you recommended it, so why do you stick with it?"

The answer is simple. We like to ride our winners, as long as we have confidence they'll keep on winning. Our sell decisions normally spring from an erosion in our confidence in a stock, not how well that stock has performed in recent months.

In our view, "because it's done well and I'm afraid it will pull back" is among the worst justifications for selling a stock. Below we present three reasons why investors shouldn't be afraid to stick with a stock that has posted nice gains:

Value. No matter how strong a company's operating momentum, if the valuation gets too stretched, we'll think about selling. On the other hand, we appreciate stocks with price momentum that still trade at attractive valuations. Two stocks on our Focus List — Apple ($110; AAPL) and Jones Lang LaSalle ($148; JLL) — have delivered total returns of at least 10% over the last year and still trade at least 10% below their five-year average P/E ratio.

Growth. S&P 1500 stocks that grew per-share profits at least 10% over the last year averaged 12-month returns of 17%. In contrast, stocks with less than 10% growth returned 1%.

Most of our Focus List Buys have delivered at least 20% profit growth over the past year. Six have posted 12-month earnings growth of at least 10% and are expected to manage similar growth over the next 12 months, while Alaska Air Group ($73; ALK) and CDW ($43; CDW) top 15% profit growth.

Quadrix. We're more likely to hang on to a winner if it maintains strong Quadrix Overall scores. Three of our Focus List Buys — Alaska, Apple, and Lear ($115; LEA) — have returned at least 10% over the last year and earn Overall scores above 97.

As the chart below suggests, a stick-with-winners strategy has served us well. Our Focus List has outperformed the S&P 500 Index in six of the last seven calendar years and eight of the last 11, and is on pace for another market-beating year in 2015. Since the start of 2004, the Focus List has gained 169.8%, versus 79.3% for the index. For a list of stocks on the Focus List, visit www.DowTheory.com/Go/Focus.

FOCUS LIST RETURNS
----------- Return -----------
Focus List
Outperformance
(%)
Year
Focus List
(%)
S&P 500
(%)
Since 2004 *
169.8
79.3
90.5
2015 *
(1.0)
(3.1)
2.2
2014
22.1
11.4
10.7
2013
36.0
29.6
6.4
2012
14.2
13.4
0.8
2011
(4.8)
0.0
(4.8)
2010
19.5
12.8
6.8
2009
40.0
23.5
16.6
2008
(48.8)
(38.5)
(10.3)
2007
22.8
3.5
19.3
2006
12.9
13.6
(0.8)
2005
8.1
3.0
5.1
2004
17.5
9.0
8.5
Returns exclude dividends, transaction costs, and the effect of our cash position.       * As of Oct. 14. 

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