Reviewing Fortune Magazine's 10 Best Stocks for 2008

A year ago, I reviewed Fortune Magazine’s 10 picks for the best stocks of 2008. I passed my judgment on Fortune’s recommended stocks based on their closing prices on the first Friday of 2008. Now, a full year later, I was curious to see how Fortune’s picks did versus the S&P 500 over the same time period and to compare my predictions for these stocks with what happened to them over the course of the year up to the close on the first Friday of 2009.

For the purposes of evaluating performance of individual stocks, I assumed that all cash distributions where kept in cash and not reinvested. The one stock of the set, Merrill Lynch (MER), which was acquired in an all-stock swap deal over this time period, I priced on the last day of the measurement period based on the value of the replacement Bank of America (BA) shares received by the MER shareholders.

Now, without further ado, let’s look at the long awaited results after an extraordinarily bad year for equities:

Annaly (NLY) - I said: “It is a rather volatile stock that is in the current at-risk business... it is bigger gamble than I am willing to take.” Yet, the stock went down only 7.2% over this time period. Doing decidedly better than S&P 500, which slipped 34% over the same time period. What helped this stock keep relatively afloat, of course, was the US Government coming in to rescue Fannie Mae and Freddie Mac – something I said I did not want to count on.

Berkshire Hathaway (BRK.A, BRK.B) - I said: “Warren Buffet is getting old, there is no succession plan, major holders are reducing their positions... will most likely be selling on a pop this year.” The stock indeed had a quick pop up in September of 8.5% from the closing level on Friday, January 4, 2008 and finished on Friday, January 2, 2009 down 26.2%. Unfortunately, I was not quick enough to take advantage of the opportunity to dump Berkshire Hathaway.

Dick's Sporting Goods (DKS) – I said: “Don’t believe their growth story in sporting goods retailing... if Dick’s disappoints with slowed growth it will get cut in half – guaranteed.” The stock indeed dropped as much as 66% from the level it was when I wrote these words and finished the time period with a 44.4% loss.

Electronic Arts (ERTS) – I said: “if ERTS misses the next big fad, as they have in the past, the stock will go down... it is trading at a rather expensive multiple – I am on the sidelines here.” This stock turned out to be one of the largest loosers, shedding 68% over the time period.

Genentech (DNA) – I said: “Would not bet on this stock, but would rather look for interesting niche plays in pharmaceuticals.” Yet, this turned out to be the best performing Fortune Magazine pick of 2008, up 24.4% over the time period. The health care alternatives I mentioned by name, while they beat the index very significantly, did not do nearly as well as Genentech.

General Electric (GE) – I said: “My only concern would be GE Capital and I will need to review the current status of that division before jumping in.” GE collapsed 49.2% since I wrote this. Troubles causing the large slide in stock price were indeed rooted in GE Capital. I only wish I would have listened to my own advice on GE better. Instead, I trusted that GE Capital was as conservative in their lending practices as their management was implying and caught a big chunk of that stock price slide.

Jacobs Engineering (JEC) – I said: “This idea assumes that commercial construction will continue to grow at a very fast pace... I am staying away.” This turned out to be a wise decision, as the company stock slid 47.8%.

Merrill Lynch (MER) – I said: “There are much safer bets in financials these days.” Merrill Lynch, was taken over by Bank of America, which itself benefited from Federal TARP money. Despite all the help, investors in this stock lost 72.3% of their money over the time period – the largest loss of any stock on the 2008 list.

Petrobras (PBR) – I said: “It’s a momentum play at this point and you have to be ready to jump ship very quickly.” The stock continued its ascent and rose another 41.3% from January 4th, 2008 and then crashed and burned, falling 52.3% over the time period in question, thus performing as I had expected.

St. Joe (JOE) – I said: “Benefits may actually outweigh the risks on this one.” This was the only stock that looked reasonably good to me at the year ago levels and it finished the time period down 23.9%, beating the index by more than 10%. Not stellar, but not too bad, considering that the equally weighted basket of all the Fortune Magazine’s 2008 stock picks would have trailed the S&P 500 index by 2.7% over the measurement time period I chose.

Now, if you look at Fortune Magazine’s own evaluation of their 2008 stock picks as of December 17, 2008, you will notice a significant difference in results reported by them and those I presented here. These differences are courtesy of a two - three week delay in the start and end dates of the measuring period and unusually volatile markets over the time period.

This again confirms my contention that picking winning stocks for the coming year, while it may be a nice gimmick for selling magazines and attracting advertisers, is not the best way for investors to operate. Most would do much better by buying quality stocks on sale and dumping them, when they are no longer attractively priced, asynchronous to changes in years, as well as other uncorrelated calendar events.

That being said, I nevertheless welcome you to tune in to Part 2 of my Fortune’s Best evaluation, where I go over the good, the bad and the ugly on the magazine’s list for 2009.

Disclosure: Long BRK.B

Comments

[User 283977:]

Based on the way the article starts out, you might get the mistaken impression that the author is hawking his predictive accuracy. However, it turns out that the author is quite aware of the speculative nature of long term stock/ market predictions and clearly points out that investors should ignore highly speculative predictions made for the purpose of selling magazines and attracting advertisers. He concludes with the advice that investors will do better buying quality stocks on sale and dumping them as company and market conditions change. Good advice.

Jan 04 12:21 PM

[Michael Mic...:]

So far Dicks Sporting Goods is holding. They are selling good with football gear after the Superbowl Sunday. Review my entire buy call on DKS at the following link.

invest2success.blogspo...

Good day,

Successful Investing Trading

www.invest2success.com

Feb 02 08:28 AM

[Ricard:]

I still think the author is hawking his predictive accuracy. I'll say this much, the author is a pro at CYA (cover your @$$).

Disclosure - I haven't read his initial 2008 predictions in full. Notice there is no link... :(


On Jan 04 12:21 PM Bob Lunn wrote:

> Based on the way the article starts out, you might get the mistaken
> impression that the author is hawking his predictive accuracy. However,
> it turns out that the author is quite aware of the speculative nature
> of long term stock/ market predictions and clearly points out that
> investors should ignore highly speculative predictions made for the
> purpose of selling magazines and attracting advertisers. He concludes
> with the advice that investors will do better buying quality stocks
> on sale and dumping them as company and market conditions change.
> Good advice.

Feb 04 12:12 AM