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Since the New Year is right around the corner I thought it would be a good time to make some stock predictions for 2012 and I will provide updates at the end of each quarter on how the stock picks are doing. Below is a list my screening criteria for stocks that I think will outperform their corresponding sector ETFs in 2012, and below the criteria are the stocks that met all the criteria.

My method for picking stocks is as follows:

I looked at stocks that were in the top 10 holdings of its corresponding ETF. The holdings data I used is from etfdb.com

I started with a Ben Graham stock valuation formula I found on oldschoolvalue.com and modified it. The original formula on the website for valuing a stock is V = (EPS) x (8.5+2g) x (4.4)) / Y

Where:

V=Intrinsic Value.

EPS=Trailing 12 month EPS.

8.5= PE of a stock with 0% growth.

G=growth rate for next 7-10 years.

4.4=Constant Value.

Y=20 yr AAA corporate bond rate.

When reading further down the page they give a more conservative formula, with a lower multiplier for the PE of a stock with 0% growth, and lower multiplier for growth, and that formula is: V = (EPS) x (7+1.5g) x (4.4)) / Y. I went a step further and even more conservative and used a final formula of:

V = (EPS) x (5+1g) x (4.4)) / Y.

I retrieved the growth data form Morningstar.com key ratios growth section, and used the 10-year average EPS growth if data was available and if not I used the 5-year average growth. I retrieved EPS data and the AAA corporate bond rates from Yahoo Finance.

I only included stocks that have had growing FCF (Free Cash Flow) as a percentage of sales. I retrieved this data from Morningstar.com key ratio’s section as well.

Any stock I included had to have a PEG (Price/Earnings to Growth ratio) of less than 2. This data was retrieved from Yahoo Finance.

Any stock I included had to have a positive EPS.

I also incorporated technical indicators into the selection process; the two indicators I used were a 14 period RSI (Relative Strength Index), and a 14 period MFI (Money Flow Index). What I did was only include stocks that had a RSI +MFI of less than 120. I retrieved this data using TD Ameritrade’s ThinkorSwim platform.

If multiple stocks in the same sector were deemed to be undervalued and met all the above criteria, I chose the one with the lowest RSI+MFI.

For my calculation of return over the next year I will assume I bought each stock at the close on December 30 2011.

For stocks in the financial sector I had to use a different set of criteria. I used the stock screener on FinViz.com, and I typed in the top 10 holdings for the financial sector ETF (XLF), and I screened those companies with the following criteria found in the screener, except the RSI+MFI, which I used the ThinkorSwim platform:

  • PEG of less than 2
  • Positive EPS
  • Positive return on assets
  • Positive return on equity
  • EPS growth quarter over quarter positive
  • Sales growth quarter over quarter positive
  • RSI+MFI of less than 120

Below each major sector is listed along with its corresponding ETF, and followed by my stock pick for that sector having used the above selection criteria. Also, there are short descriptions from yahoo finance business summary of the company included as well as trailing PE and dividend information from yahoo finance.

Technology: Technology Select Sector SPDR (XLK)

Oracle Corporation (ORCL)

Oracle Corporation, an enterprise software company, develops, manufactures, markets, distributes, and services database and middleware software, applications software, and hardware systems worldwide. Oracle has a trailing PE of 14.19 and a dividend yield of 0.90%.

Utilities: Utilities Select Sector SPDR (XLU)

Exelon Corporation (EXC)

Exelon Corporation operates as a utility services holding company in the United States. The company primarily engages in the generation of electricity. It generates electricity from nuclear, fossil, hydroelectric, and renewable energy sources. Exelon has a trailing PE of 12.02 and a dividend yield of 4.80%.

Energy: Energy Select Sector SPDR (XLE)

National Oilwell Varco, Inc. (NOV)

National Oilwell Varco, Inc. designs, constructs, manufactures, and sells systems, components, and products used in oil and gas drilling and production; provides oilfield services and supplies; and distributes products, and provides supply chain integration services to the upstream oil and gas industry worldwide. National Oilwell Varco has a trailing PE of 15.39 and a dividend yield of 0.70%.

Consumer Staples: Consumer Staples Select Sector SPDR (XLP)

Colgate-Palmolive Co. (CL)

Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. Colgate-Palmolive has a trailing PE of 18.62 and a dividend yield of 2.50%.

Healthcare: Healthcare Select Sector SPDR (XLV)

Gilead Sciences Inc. (GILD)

Gilead Sciences, Inc., a biopharmaceutical company, engages in the discovery, development, and commercialization of therapeutics for the treatment of life threatening diseases worldwide. Gilead has a trailing PE of 11.76 and has a dividend yield of 0.00%.

Industrials: Industrial Select Sector SPDR (XLI)

United Technologies Corp. (UTX)

United Technologies Corporation provides technology products and services to the building systems and aerospace industries worldwide. United Technologies has a trailing PE of 13.79 and a dividend yield of 2.60%.

Consumer Discretionary: Consumer Discretionary Select Sector SPDR (XLY)

Target Corp. (TGT)

Target Corporation operates general merchandise stores in the United States.

Target has a trailing PE of 12.04 and a dividend yield of 2.30%.

Materials: Materials Select Sector SPDR (XLB)

Alcoa, Inc. (AA)

Alcoa, Inc. engages in the production and management of aluminum, fabricated aluminum, and alumina. Alcoa has a trailing PE of 9.06 and a dividend yield of 1.40%.

Financial: Financial Select Sector SPDR (XLF)

American Express Company (AXP)

American Express Company, together with its subsidiaries, provides charge and credit payment card products, and travel-related services worldwide. American Express has a trailing PE of 11.83 and a dividend yield of 1.50%.

Telecommunications: iShares Dow Jones US Telecom (IYZ)

CenturyLink, Inc. (CTL)

CenturyLink, Inc., together with its subsidiaries, operates as an integrated communications company. The company provides a range of communications services, including voice, Internet, data, and video services in the continental United States. CenturyLink has a trailing PE of 24.54 and a dividend yield of 7.80%.

Transportation: iShares Dow Jones Transportation Average (IYT)

Norfolk Southern Corp. (NSC)

Norfolk Southern Corporation, through its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods primarily in the United States. Norfolk Southern has a trailing PE of 14.17 and a dividend yield of 2.40%.

Disclaimers: The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

Source: Stocks Expected To Outperform Corresponding Sector ETFs In 2012