Buy Lists Retooled

11/14/2011


We're typically reluctant to name our single favorite stock. For one thing, we don't want you to bet the ranch on one name. For another, we don't think deliberating on whether a stock ranks No. 1 or No. 5 is always the best use of time.

Once you've identified a stock as one of a handful of favorites, there is not much payoff in ranking it further — unless you are prepared to stake your portfolio on one stock. While you only need to get rich once — and you should be prepared to take some extra risk if you are truly convinced you've found a big winner — history suggests your chances for success are much better with a portfolio of at least 20 to 30 stocks from a variety of sectors.

The key is finding 20 to 30 stocks you truly like, allowing you to reduce risk without sacrificing expected return. Especially in difficult market environments, finding 20 to 30 must-have stocks can be difficult. That is one reason we sometimes hold cash in our equity portfolios. Rather than put money in an unattractive sector — or put more money in a sector in which we're already heavily invested — we'll hold some reserves in a short-term bond fund.

In nearly all environments, the work we do in monitoring our 23-stock Buy List leads to the emergence of some names as favorites. We get mileage from this work four ways:

• The Focus List, representing our top 12 to 17 picks for year-ahead returns, is a great choice for subscribers looking to complement an existing portfolio. While we aim to have several sectors represented on the Focus List, it is a collection of favorite ideas rather than a diversified portfolio. This week we're adding AGCO ($47; AGCO), Chevron ($109; CVX), and Google ($612; GOOG) to the Focus List, and dropping CSX ($22; CSX) and Walter Energy ($76; WLT).

• On our Buy List, which typically has 20 to 30 stocks, we hold slightly bigger positions in each of the Focus List stocks. This week we're lifting the target weights for Focus stocks to 3.7% and for non-Focus stocks to 3.0%. In other words, if you're mimicking our Buy List, you should hold about 3.7% of your portfolio in each of the 13 Focus stocks and 3.0% in each of the other 10 Buys. This week we're dropping CSX from the Buy List, replacing it with Wyndham Worldwide ($33; WYN). Our Buy List now has 78.1% in stocks, with the remaining 21.9% in a short-term bond fund.

• Our Long-Term Buy List, representing our top investment-grade picks for the next 24 to 48 months, also holds outsized positions in each of the Focus stocks. This week we're adding Wyndham to the Long-Term Buy List, boosting its stock-market exposure to 78.8%.

• Our Lucky 7 report, available at www.DowTheory.com/Go/Lucky7, is now free to subscribers. This package provides two-page statistical reports on our seven favorite stocks for 12-month gains. We also provide a variety of other reports, such as the top 10 dividend growers or Quadrix leaders under $25. We also offer reports on every stock in the S&P 500 or Nasdaq 100 indexes. Forecasts subscribers receive reports on all Monitored List stocks free, plus a 10% discount on all other reports.

Wyndham, Google, Walter, and CSX are reviewed in Porfolio Review. AGCO, reviewed on page 8 in the Oct. 10 newsletter, earns a near-perfect Quadrix Overall score of 99. AGCO's third-quarter results were impressive, and consensus profit estimates for both 2011 and 2012 have moved meaningfully higher over the past month. While AGCO shares have also moved higher, they remain cheap at 10 times the 2012 consensus.

Chevron, reviewed on page 8 in the Nov. 7 newsletter, offers solid profit-growth potential and a 3.0% dividend yield. The stock earns an Overall score of 97, helped by a Value score of 89. At less than nine times the 2012 consensus profit estimate, the stock is cheap relative to its peer group and relative to its own historical norms.


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