Barron's top 10 stock picks for 2014 is all over the news. Just for the record, those names are: Citigroup (C), Intel (INTC), General Motors (GM), Nestle (OTCPK:OTCPK:NSRGY, OTCPK:OTCPK:NSRGF), Simon Property (SPG), U.S. Airways (LCC), Barrick Gold (ABX), Canadian Natural Resources' (CNQ), Deere (DE), and Metlife (MET).
Barron's also announced its top 10 picks for 2013 at the end of 2012. This article evaluates the results of these picks. Before you write that off an as analysis of the past, please read through the entire article.
Below are those 10 stocks: Apple (AAPL), JPMorgan Chase (JPM), Royal Dutch Shell (RDS-A), Novartis (NVS), Barnes & Noble (BKS), Western Digital (WDC), Blackrock (BLK), General Dynamics (GD), Marathon Petroleum (MPC), and Viacom (VIAB).
With S&P up 27% YTD, it is a little hard to imagine a regular portfolio doing better than that. But Barron's portfolio has done just that and has beaten the S&P returns quite handily as shown in the table below. Please note that the yield mentioned in the table below is the current yield. In a nutshell, this portfolio has returned about 35% overall YTD.
(Source: Table compiled with data from Finance.Yahoo.Com)
But what is the message here? Why did these 10 stocks do so well to have turned $10,000 to $13,500 in just a year. Below are some of the common characteristics we found when evaluating these stocks.
- Valuation Matters: As Seeking Alpha had mentioned in the link above, half of the 2013 picks were stocks with very low valuations. Stocks like Apple had lost steam towards the end of 2012 and were ripe for the picking. At the risk of sounding repetitive, broken stocks and broken companies are two different things.
- Dividends Matter: 9 out of the 10 stocks paid dividends, except Barnes & Noble.
- Dividend Growth Matters: 8 out of the 9 dividend paying stocks increased their dividends in 2013 when compared to 2012. (except Western Digital)
- Diversification Is Key: The 10 stocks were from the Consumer Goods, Financial-Banks, Major Integrated Oil & Gas , Healthcare, Services-Retail, Technology, Financial-Asset Management, Industrial Goods, Oil & Gas Refining and Marketing, and Services-Entertainment. Though there appears to be two technology stocks (AAPL and WDC), or two oil stocks (MPC and RDS-A) these companies are really not exactly in the same line of business.
Message #1: The key message is not about Barron's stock picking abilities. It is that well a diversified portfolio of undervalued, dividend paying, and dividend growth stocks will very likely beat the market.
Message #1 a) And you may want to avoid stocks like Barnes and Noble for such a portfolio. We are not saying that because the stock underperformed after Barron's call but because the company has been on a sound long term decline and to make matters worse, does not pay a dividend either.
Message #2: When you buy an undervalued stock, you get a double whammy if the stock also pays a dividend and you reinvest the dividends and accumulate more undervalued stocks. A triple whammy if you will if the stock starts getting some positive support as well. Remember we are talking about broken stocks of sound companies.
Conclusion: Does Barron's 2014 portfolio stack up well with these metrics? The theme again continues. A majority of those stocks have very low valuations and 8 out of the 10 pay dividends. The portfolio again appears diversified with stocks from Financial to REIT to Technology to Consumer goods in terms of sectors/industries. But it does not matter what Barron's picks are or how good they are, as the stock market has thousands of such stocks out there and an individual investor could easily construct a similar winning portfolio, if not better.