Answering the headline question: Of course there are! In Part II I will discuss in depth three such firms I believe may be big winners in 2014 -- and I'll provide links to three others.
First, however, some perspective on why we select such stocks, as well as individual industries, sectors, and regions - but never "the market."
With the massive amounts of data available to us, most investors have been seduced into thinking about "the stock market" as some sort of monolith. Before making an investment, the only question they ask is "Is the market going to go up this month / quarter / year? If the market goes up, then the stock I'm considering will go up. If I don't think 'the market' will rise, I'd better not buy anything."
This is just plain wrong thinking. What we call the "stock market" is an abstraction based upon some index, a convenient way to see a snapshot of what percentage of a certain type of stock is mostly up or mostly down. You can make money buying a broad-based index like the S&P 500 or the Dow 30 when the index goes up - and you will lose it all if the index goes down a like amount. If you buy an index fund you have either become a buy-and-hold investor who may have to cash out at exactly the wrong time, or you have become a de facto market timer.
Rather than selecting the best time to buy a company whose prospects look attractive and the best time to sell that particular security when it is no longer attractive, you are now reduced to studying all manner of day-to-day indicators that have little or nothing to do with the revenue, earnings and stock price of a particular company or set of companies, like what is happening in the Eurozone, what the election results are in Mexico, when interest rates will rise in the US, what home sales are this week, what the price of tea is in China, etc., etc.
"The market" is merely an index that reflects what every single stock comprising that index does on a particular day. There are advancers and there are decliners. If there are more bigger-cap stocks declining in a float-capitalization weighted index like the S&P 500, it means "the market" will go down that day - even if "most" stocks comprising the index went up. In a price-weighted index like the Dow Jones Industrial Average, the differences can be even more pronounced.
Many investors looking at the 29%+ return in the S&P 500 this year are wondering why their portfolio didn't match that return. They forget that the S&P is float-capitalization weighted so the companies with the most shares available for public trading at the highest prices are the ones that dominate this index. And 2013 was a year where the flight to bigness was particularly in evidence. That doesn't mean 2014 will follow suit, or that these big firms will be as safe in 2014!
So, for example, let's say you own these S&P 500 companies: retailer Urban Outfitters (URBN), gambling equipment supplier International Game Technology (IGT), industrials US Steel (X) and Allegheny Technologies (ATI), utility TECO (TE), financials Legg Mason (LM) and Zions Bancorp (ZION), hospital company Tenet Healthcare (THC), tech firm FLIR Systems (FLIR), cable provider Cablevision (CVC), and energy firms Newfield Exploration (NFX,) and Diamond Offshore (DO.) That's twelve pretty well-known companies comprising a rather well-diversified (by sector) portfolio. None are small fry - the minimum listing requirement to be included in the S&P 500 is a market cap of $4 billion or more.
Let's say that every single one of your 12 stocks goes up 10% in one day, but Apple (AAPL) fell 10% on that day. If all other stocks in the index were unchanged, "the market" as measured by the S&P 500 index, would show a decline of 2.8% (at today's level, a decline of 51 points!) That's because your 12 positions, all put together, only account for 0.3% of the S&P 500 index - AAPL, all by itself, is 3.04%, or more than 10 times as "significant" when computing the index value up or down.
In a float-adjusted market-capitalization index like the S&P 500, the institutional favorites -- the behemoths with huge liquidity -- rule. In contrast to your top 12 holdings, comprising 0.3% of the S&P 500, between them, the top 12 in the S&P 500 - Apple , Exxon Mobil (XOM), Google (GOOG), GE, Microsoft (MSFT), Johnson & Johnson (JNJ), Chevron (CVX), Proctor & Gamble (P&G), Wells Fargo (WFC), JP Morgan Chase (JPM), Berkshire Hathaway Class B (BRK.B) and Pfizer (PFE) - comprise 20.57%! [All data courtesy of S&P as of 30 Dec 2013.]
It is a market of stocks, not a stock market. Sector, industry, size and individual security can all skew, for better or worse, the numbers we see as "the market." (That's why all of our "index" holdings are in specific sectors, industries, regions, etc.)
By the way, it's even worse if we use the Dow Jones Industrial Average, the "Dow 30", as our benchmark as to where our portfolio "should be." Since this index is price-weighted, stocks with the highest price will skew the results. In 2013, price laggards Alcoa (AA), which finished the year at 10.63, Bank of America (BAC), which finished the year at 15.57, and Hewlett Packard (HPQ), which finished the year at 27.98, were replaced by Visa (V) at 222.68, Goldman Sachs (GS) at 177.26, and Nike (NKE) at 78.64.
This didn't immediately raise the index because the index uses a divisor to steady out the fluctuations such a massive change would otherwise create. That divisor currently creates a 6.42 change in the index for every $1 change in the price of any of the 30 stocks. But you can clearly see that a higher-priced stock will move the averages considerably more than a lower-priced one! A 10% move in Alcoa would have taken it to 11.69, a $1.06 move, resulting in a 6.8 point increase in the value of the Dow. But a mere *1%* rise in Visa would be $2.23, and would result in a 14.3 points increase in the Dow. (If Visa made the same 10% move as our hypothetical move in Alcoa, above, it would propel the Dow up 143 points based on just one stock moving that day!)
That's why we buy individual equities, well-selected actively-managed mutual funds, specialized ETFs that favor the sectors and industries our research tells us are the best, and why we add income in the form of dividends and calls written on some of our positions. We don't buy "the market." There is no risk management attached to the S&P 500. It simply reflects the number of stocks up or down on a given day. That rise may be informed or uninformed, highly risky or quite safe, smart or stupid.
We are fortunate, seeking anomalies rather than buying an index. There are always mis-priced securities available for purchase. The question, however, isn't simply "How do I find stocks that are selling below what a reasonable competitor of theirs would like to buy them for?" That answer yields to brutally detailed research; the strategy that flows from it is to have the conviction that you have done your analysis well and buy when others don't want the company's shares.
But we believe investors need to take the extra steps of adding diversification and income to their portfolios. Why? Because you may be right about the company, but what if no one recognizes the brilliance of your analysis and the stock just sits there month after month? You need to be diversified and have a stream of income until you decide your analysis was flawed and you reallocate assets or you conclude you are right but must a bit longer for others to be willing to open their wallet and buy shares in agreement.
This approach is characterized by our willingness to select individual stocks that are overlooked and thus cheap, not necessarily in price but in terms of their financial strength, their profitability, their prospects for growth, their standing vis a vis their best competitors, and their proven ability to be as flexible as we ourselves are when times change.
While it is true that most stocks are fairly priced or overpriced right now, with prudent risk management we can still find fine companies that may have hit a short-term hiccup and are now ready to move ahead. Please see Part II of this article for a better look at three companies (and a "bonus" three) we believe fit the bill.
The Fine Print: As Registered Investment Advisors, we believe it is our responsibility to advise that we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.
Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.
We encourage you to do your own research on issues we discuss to see if they might be of value in your own investing. We take our responsibility to offer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we "eat our own cooking," but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.