Streetwise

Lauren Rudd

Sunday, December 4, 2011

12 Stocks for the Coming Year

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 exceeds the sum of what a 30-year treasury bond would pay, along with what you will lose through taxes and inflation with a kicker for risk.

The guideline I give my students is a minimum compounded annual growth rate over 2-3 years of 12 to 15 percent. A prudent stock selection process should enable you to meet that objective and probably even surpass it. On the other hand, some like Warren Buffett believe that future long-term stock market returns can be estimated as nominal GDP growth plus expected dividend yield.

According to that formula an estimated 3 percent nominal GDP growth rate plus a 3 percent dividend yield equals an expected long-term total return of 6 percent. However, to invest in stocks you want a greater reward for the risk entailed, so I use a minimum of 12 percent.

To achieve your returns, you are looking for those companies that have successfully weathered 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 to 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, 2010. The second is the price one year later on November 30, 2011. The third is the percentage capital gain without taking into account dividends and the fourth is the dividend yield based on the 2010 share price.

Badger Meter (BMI, 42.42, 31.07, -26.8 percent, 1.50 percent), Church & Dwight (CHD, 32.07 (split adj.), 44.25, 38.0 percent, 1.00 percent), Coach (COH, 56.54, 62.59, 10.7 percent, 1.60 percent), Joy Global (JOYG, 76.22, 91.28, 19.8 percent, 0.90 percent), Microchip Technology (MCHP, 33.61, 34.91, 3.9 percent, 4.30 percent), Suburban Propane (SPH, 54.62, 46.50, -14.9 percent, 6.20 percent), Deckers (DECK, 76.90, 108.94, 41.7 percent, 0.00 percent), VF Corporation (VFC, 82.88, 138.69, 67.3 percent, 3.50 percent), McDonalds (MCD, 78.30, 95.52, 22.0 percent, 3.60 percent), MWI Veterinary Supply (MWIV, 61.10, 69.11, 13.1 percent, 0.00 percent ), CPI Aerostructures (CVU, 13.53, 14.00, 3.5 percent, 0.00 percent), Valspar (VAL, 33.04, 36.88, 11.6 percent, 2.20 percent).

In summary, the 12 stocks produced an overall one-year capital gain of 15.82 percent before dividends and a 17.89 percent total return. Did every stock perform well? No, but that virtually never happens; it is the overall total return that matters.

During the same period, the Dow Jones Industrial Average chalked up a gain of 9.44 percent and the S&P 500 a gain of 5.68 percent without dividends. The 2010 annual dividend yield for the Dow was about 2.85 percent and 1.84 percent for the S&P 500.

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 Coach, Church & Dwight, Joy Global, Deckers Outdoor, VF Corporation, McDonalds, MWI Veterinary Supply and Valspar, to which I am going to add Southern Copper (SCCO), Kimberly-Clark (KMB), Annaly Capital Management (NLY) and Terra Nitrogen (TNH).

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