40 Market-Leading Stocks Expected to Outperform the S&P 500

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Includes: ACE, ALL, ANTM, BAC, BAM, BBT, BCS, BG, BK, BPO, CB, COF, CSC, FITB, GS, HIG, JPM, KT, L, LNC, LUK, MET, MS, MT, MTU, NLY, PFG, PRU, RF, SAN, SKM, SNY, STI, TAP, TM, TRV, VLO, VOD, XL
by: Insider Monkey

Beating the S&P 500 index by investing in large-cap stocks has been a formidable challenge for most mutual fund managers. Most mutual funds underperform the S&P 500 index after fees and expenses. Only some mutual funds beat the S&P 500 index before fees and expenses, and the outperformance is usually not more than a couple of percentage points.

James O'Shaughnessy discussed limited value investing to market leading large cap stocks in his book What Works on Wall Street. Here is how O’Shaughnessy determines which stocks are market-leading:

Market leaders are like large stocks on steroids. They come from the large stocks universe but also possess characteristics beyond mere size. To be a market-leading company, you must be a non-utility stock with a market capitalization greater than the average, shares outstanding greater than the average, cashflow greater than the average, and finally, sales 50 percent greater than the average stock.

O’Shaughnessy picks the top 50 stocks with the lowest price-to-book ratio among the market leaders. In a 40-year backtesting, this strategy returned an average annual compound return of 16.6% vs. 10.6% for the S&P 500 index. Basically, this strategy beats the S&P 500 index by 6 percentage points per year on average.

The beta of this strategy is 1.04, slightly higher than the S&P 500. Of course, these results are based on average returns and annual performance of the strategy may significantly deviate from these values.We obtained the list of stocks with PE ratios below 20 from Google Finance, and ranked them based on their 1-year returns. Here are the top 40 stocks that satisfy O’Shaughnessy’s screens:

Company name

Symbol

Market Cap

Price to Book

1-Year Return (%)

Div yield (%)

JPMorgan Chase & Co.

JPM

171.31B

1.05

4.98

0.44

Vodafone Group Plc

VOD

138.69B

1.03

24.13

4.64

Bank of America Corporation

BAC

138.56B

0.68

-15.55

0.28

Toyota Motor Corporation

TM

126.07B

1.01

6.16

1.24

Banco Santander, SA

STD

92.20B

0.93

-18.06

7

Sanofi-Aventis SA

SNY

83.54B

1.2

-10.36

4.3

Goldman Sachs Group, Inc.

GS

80.36B

1.14

-9.45

0.88

Mitsubishi UFJ Financial

MTU

64.05B

0.67

-6.33

2.85

Barclays PLC

BCS

54.82B

0.72

-9.29

1.78

ArcelorMittal

MT

50.85B

0.87

-17.73

2.15

Morgan Stanley

MS

41.90B

0.89

-6.69

0.72

MetLife, Inc.

MET

41.71B

0.91

6.25

1.65

The Bank of NY Mellon

BK

35.01B

1.1

-3.13

1.25

Prudential Financial, Inc.

PRU

28.34B

0.92

9.57

1.88

The Travelers Companies

TRV

25.02B

1.01

10.72

2.45

WellPoint, Inc.

WLP

24.96B

1.06

7.02

1.49

Capital One Financial Corp.

COF

22.96B

0.85

23.99

0.4

ACE Limited

ACE

20.23B

0.89

21.69

2.16

BB&T Corporation

BBT

18.57B

1.13

-12.61

2.24

Brookfield Asset

BAM

18.43B

1.04

27.07

1.65

The Chubb Corporation

CB

17.23B

1.13

16.46

2.64

Loews Corporation

L

17.12B

0.94

11.21

0.6

The Allstate Corporation

ALL

16.28B

0.89

0.83

2.65

Valero Energy Corporation

VLO

15.61B

1.09

41.34

0.69

Annaly Capital Management

NLY

14.29B

1.17

-1.27

14.32

SunTrust Banks, Inc.

STI

14.00B

0.79

6.66

0.14

SK Telecom Co., Ltd.

SKM

11.67B

1.2

2.47

5.57

Hartford Financial Services

HIG

11.01B

0.6

0.26

1.49

Fifth Third Bancorp

FITB

10.67B

1.06

5.7

0.29

Principal Financial Group,

PFG

9.86B

1.06

26.2

1.7

Bunge Limited

BG

9.78B

0.87

12.46

1.34

KT Corporation

KT

9.62B

0.98

-9.67

4.76

Lincoln National

LNC

9.20B

0.74

9.5

0.67

Regions Financial

RF

9.06B

0.69

0.54

0.54

Brookfield Properties

BPO

8.39B

1.09

16.58

3.26

Leucadia National Corp.

LUK

8.20B

1.2

35.47

0.73

Molson Coors Brewing

TAP

8.01B

1.04

1

2.57

Computer Sciences

CSC

7.10B

1.12

-12.5

1.71

XL Group plc

XL

6.74B

0.66

18.32

1.98

Click to enlarge

JP Morgan is extremely popular among hedge funds. Hedge funds, 164 of them, own 4% of JPM’s outstanding shares. During the fourth quarter, they spent $1.8 billion to place their bullish bets. Steven Mandel’s Lone Pine, John Griffin’s Blue Ridge, Lee Ainslie’s Maverick, George Soros, and David Tepper’s Appaloosa are among the high profile hedge funds invested in JPM. Likewise, WellPoint is one the nine healthcare stocks hedge funds are crazy about.

The majority of these stocks are financials. Clearly financial stocks are value stocks, i.e. with low price-to-book ratios, and investors are still suspicious about them after their performance during the 2008-2009 crisis. Maybe that's why value stocks manage to beat the market on the average; nobody wants to buy them.

Disclosure: I am long VOD, MS.