Streetwise

Lauren Rudd

Sunday, December 5, 2010

12 Possible Research Candidates

The period between Thanksgiving and the start of the New Year is an excellent time to work on your portfolio. In doing so, you should strive to create a return that, at a minimum, exceeds the sum of what a 30-year treasury bond would pay, along with what you will lose through taxes and inflation.

The guideline I give my students is that their objective should be to achieve a minimum compounded annual growth rate over 2-3 years of 10 to 15 percent. A prudent stock selection process, combined with a reasonable asset allocation and risk profile, will likely enable you to meet that objective and probably even surpass it.

What you are looking for are those companies that have been able to weather the Great Recession and are now on-track to follow the economic recovery as it unfolds. However, you are going to need an edge. If you want to become a market-trouncing master strategist, your knowledge of a given company must be superior to that of the great unwashed. So where do you begin?

For those of you who need little help or motivation to get started, each year at this time I provide you with a dozen possible research candidates. To make it interesting, I then review their performance a year later.

Here are the stocks from last year and their one-year performance. I have provided you with four numbers for each company. The first is the price on November 30, 2009. The second is the price one year later on November 30, 2010. The third is the dividend yield based on the 2009 share price, and the fourth is the percentage capital gain without taking into account dividends.

Badger Meter (BMI, 35.18, 42.42, 1.59%, 20.58%), BestBuy (BBY, 42.83, 42.75, 1.4%, -0.26%), Church & Dwight (CHD, 59.04, 65.25, 1.15%, 10.52%), Clorox (CLX, 60.73, 61.81, 3.62%, 2.56%), Coach (COH, 34.75, 56.54, 1.73%, 62.71%), General Dynamics (GD, 65.90, 66.09, 2.55%, 0.29%), Joy Global (JOYG, 53.54, 76.22, 1.31%, 42.55%), Kellogg (K, 52.58, 49.23, 3.08%, -6.37%), Microchip Technology (MCHP, 26.24, 33.61, 5.26%, 28.09%), Stryker (SYK, 50.40, 50.09, 1.19%, -0.62%), Suburban Propane (SPH, 43.90, 54.62, 7.74%, 24.42%), Zimmer (ZMH, 59.17, 49.26, 0%, -16.75%)

In summary, the 12 stocks produced an overall one-year capital gain of 13.98 percent before dividends. The average overall dividend yield is 2.55 percent, thereby producing an overall gain of 16.53 percent, a return that exceeded my suggested guideline. Did every stock perform well? No, that virtually never happens and the overall result is all that really counts.

During the same period, the Dow Jones industrial average chalked up a gain of 6.39 percent and the S&P 500 index produced a gain of 7.75 percent. But the returns of both indexes are capital gains alone without dividends. The current average dividend yield for the Dow is 2.86 percent and 1.79 percent for the S&P 500.

Although the dividend yield for the two indexes would likely be slightly higher back on November 2009, the current yield is close enough for comparison purposes. Therefore, it is safe to say that our 12-stock portfolio had nearly twice the return of either index.

Yet, all this is ancient history. The key question is what 12 stocks can I come up with that might tickle your fancy going forward? Here is my list:

I am going to continue with Badger Meter, Church & Dwight, Coach, Joy Global, Microchip Technology, and Suburban Propane from our previous list. To that grouping I am adding Deckers Outdoor (DECK), VF Corporation (VFC), McDonalds (MCD), MWI Veterinary Supply (MWIV), CPI Aerostructures (CVU) and Valspar (VAL).

The latter six companies are new to this column, which means you can look forward to seeing discussions about them in the future.