Fifty Percent Down In 2011, Will You Find Your Fortune In 2012?

by: Colin Lea

In September 2011, I wrote an article that followed the progress of Fortune Magazine's Top 10 stock picks for 2011. You can see how they all fared here, but it was really a mixed bag-- with two big winners, two big losers and the rest split 40/60 for win / loss performance.

The reason for writing these articles is not to outline my reasoning for buying or selling the stocks, but to place on the record for your average investor, an easy to see guide to each of the stocks performance relative to each other. But more importantly, in writing these articles and making these recommendations each year, Fortune Magazine (along with every other major and minor publication that does the same) is offering 'financial advice' (albeit general) to your average investor. Paid financial advice that is, if you obtain the information by being a paid up reader or subscriber of its print publication (or for free if you access from the web). For disclosure purposes, I am a subscriber of Fortune Magazine (Forbes last year, Fortune this year), and I access information on their articles free from the web.

The reason I believe it is important to independently record (and remark on) their investment recommendations, is because of the following:

"Consider the fate of our Best Stocks for 2011. A year ago, we identified 10 reasonably priced growth companies (average price/earnings ratio: 12) that we believed were poised for big profit growth and even bigger stock gains. Well, we were half right. Since then, our stocks reported average annualized earnings growth of 53%, compared with an average 17% for stocks in the S&P 500 index (SPX). Unfortunately, the market was unimpressed, and the picks returned an average of -2.1%, vs. a 7.8% gain for the S&P in the 12 months ended Nov. 30. It's enough to make us want to march down to Zuccotti Park and pitch a tent." (Source: CNN Money)

"We were half right". It's a positive (non emotive and non-committal) way of saying "50% of our stock recommendations were wrong". Imagine being a client and having your financial adviser / planner / broker greeting you at the end of the year with "Well Mr. and Mrs. Smith (big smile), we were half right this year. Of the $100K you invested, we placed it into our best 10 recommendations to clients, and we achieved the following returns:

  • +34%
  • +33%
  • +24%
  • +17%
  • -3%
  • -13%
  • -24%
  • -37%
  • -42%
  • -44%

(Concludes conversation with very genuine (but non-committal) look of remorse and sorrow...) End result I imagine would be a less than impressed Mr. and Mrs. Smith.

Obviously, the example is still focusing on the provision of general advice only, and of course, the publisher can't take into account specific individual circumstances of all its readers. But it does beg the question, if publishers are to continue running these types of articles year in year out, at the very least there could be some more rigor to the selection process. Three paragraphs per stock just doesn't cut it. For example, articles on Seeking Alpha that focus on just one stock are often essays in their own right. I understand that publishers (let's use Fortune in this case) can't deliver this level of detail in their print publication; but when I go to the web I would expect a more professional and detailed level of analysis, not just the same three paragraphs.

Keep in mind, there are 'Mum and Dad' investors who may purchase stock based on these recommendations. I'm not saying it's entirely sensible if that's what they choose to do, I'm saying thatin printing such a generalized article, the publisher could be more forthcoming with its stock selection rationale. Why that is important (beyond the needs of the average investor) is because of the following statement:

"Despite these miserable results, it should be noted, we've still beaten the S&P 500 in four of the past six years." (Source: CNN Money)

Whew, that's a relief. Here's my $100K. In all seriousness, if the result at the end of the year is a published whimsical (humility noted) "We were right 50% of the time", I'd try and avoid claiming the moral high ground by saying "We've won four out of the last six contests". It just springs to mind a football analogy: "A week is a long time in football, and you are only as good as your last game". So yes, four wins out of six is a 66% win ratio, but it's irrelevant if in your last game on the stock market your 108% of combined gains was wiped out by 163% of losses... Why, that would almost be margin call or bankruptcy territory, would it not?

All of that aside, it should be noted that the advice is general advice, aimed at generating interest to sell more issues of a monthly publication, at year start and year end. But keep the comments in this article in the back of your mind when it comes to investing, and how the stock performs in 2012. I for one will be watching, tracking, and commenting.

Fortune Magazine's Top 10 Stock Picks for 2012 are as follows:
(all entry prices are as at 13th December 2011)

  • Apple Inc (NASDAQ:AAPL) $388.81
  • Caterpillar (NYSE:CAT) $90.98
  • Enbridge Energy Partners (NYSE:EEP) $30.55
  • Goodbridge Tire (NYSE:GT) $13.42
  • Halliburton (NYSE:HAL) $31.86
  • Intel (NASDAQ:INTC) $23.56
  • Johnson Controls (NYSE:JCI) $29.99
  • Lockheed Martin (NYSE:LMT) $76.73
  • Microsoft (NASDAQ:MSFT) $25.76
  • Royal Bank of Canada (NYSE:RY) $46.89

To see more information relating to the stocks selection, see the publisher's article here. I will write a quarterly update on the stocks performance on or about the 13th of March, 13th June, 13th September, and a year end article as at 13th December to see how the Fortune Magazine recommendations fared 12 months on.

Disclosure: I am long CAT.

Additional disclosure: This advice is general advice only. You should seek independent professional financial advice before making any investments of your own.