My Top Ten list for 2013 will be my final top ten. The lists have served a selfish purpose. They've called attention to my skill set, helping me connect to like-minded investors and attracting capital to my portfolios.
Each of the three previous lists have outperformed the S&P 500: 97% to 27% in 2009, 21% to 13.5% in 2010, and 70% v. 14% so far in 2012. What's really cool about 2012's list is that 10 out of 10 picks are outperforming, by double or better. (Note: I didn't post a list in 2011. Click here if you'd like to review the record.)
I get asked about my methodology quite often: I take a lot from Buffett, modified to align with game theory concepts. What's really helped my performance, in particular, has been a switch in emphasis in how I study operating models, from an inward to an outward focus. Instead of studying each model in isolation, I've been focusing on the interrelationships and interactions between operating models - or, as I like to call it, the "dance of competition."
A takeaway from my research on the dance: More than in past cycles, your stock portfolio should emphasize #1, best-in-class companies. The natural advantages that inure to market leaders are greatly magnified in a web-centric economy, to the detriment of marginal, less efficient operating models. That's because a connected world is a smaller world, a tighter world. And in many categories, it's a winner-take-all world.
Buy: Mueller Water Products (MWA)
My eighth pick for my Top Ten list for 2013 is Mueller Water Products, a market leader in water infrastructure. They're the #1 player in fire hydrants, gate valves, and butterfly and ball valves. The stock was part of my Top Ten list for both 2009 (down 29%) and 2012 (up 120%).
Here's why you should be interested: Mueller is a lagging beneficiary of a rebound in housing - about one year behind, by my estimation. You won't see Mueller's operating numbers jump until homebuilders work through their existing lot inventory and begin to develop land. So-called "A" lots are already in short supply and most public homebuilders have begun forays into land development to keep their respective lot pipelines robust.
Earnings at Mueller are set to soar (the operating leverage in this model is a beauty to behold), but we won't see the full impact until 2014 or 2015. In addition to a rebound in land development, another catalyst for Mueller is their market-leading and fast-growing leak detection technology. America's water infrastructure is in sad shape (a well-regarded engineering group gave it a grade of D-), the victim of years of underinvestment. Mueller's acoustic, non-invasive equipment helps municipalities prioritize remedial work via early detection of problems and leaks.
With multiple moving parts to this story, I can't be precise as to Mueller's potential market value. The market says they are worth $850 million right now; my guess is that their value will reach $1.2 to 1.4 billion in the next couple of years, or about one times sales. In my view, given their market leadership position and large installed base, the risk of owning Mueller is modest.
Look for my 9th pick, to be posted next week
I've got a surprise in store for my next pick, a return to my turnaround stock roots. Old habits die hard, and while I regularly warn investors to steer clear of troubled stocks, I can't resist posting this one. It's in a category I haven't studied before, so it's been a lot of fun getting up to speed and learning about the primary players. I'll finish my analytical work this weekend and post the new idea early next week.
Disclosure: I am long MWA.