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Even the most skilled stock pickers know that there is a lot more to performance than simply picking stocks. For example, one way to goose performance is to concentrate your portfolio. Why diversify capital over your one hundred best ideas, after all? Why not focus your capital on your ten best ideas, or even your top three or four?

Focusing your capital on a handful of stocks gives you a chance to score big-time outperformance. With one hundred stocks or more in a portfolio - as is the case for most stock funds - it's extraordinarily unlikely you can beat the S&P 500 by twenty or thirty percent in any given year. With just a bare handful of stocks in your portfolio, though, the odds you can outperform in a big way go up considerably.

But there is a cost to owning a focused portfolio. In exchange for a chance at big-time outperformance, you've got to be willing to stomach some big-time volatility. I don't want to sugarcoat the effort required when you own just a few stocks, because it's much tougher than most investors imagine. Unless you have absolute conviction in your methodology, it can be difficult to stay the course when the market moves against you.

Another way to employ focus is to limit your portfolio to a few, narrowly defined themes. It's my favorite way to use focus, in part because it doesn't limit me to any certain number of stocks. To be sure, within a given theme, I might own just three or four stocks, but it's also possible I'll own many more.

Case in point: My analytical work suggests the regional banks are materially undervalued and are poised to move higher over the next couple of years. When an entire group is materially undervalued, like with the regional banks, a smart play is to diversify within that group, pocketing the gains to be had while avoiding the risk of owning just a few names.

The outperformance of my Top Ten List, posted exclusively at Seeking Alpha in December, has been due, in part, to a focus on just three themes, to the intentional exclusion of others. I'll discuss those themes below, but first, here is a summary of the performance (as of this writing). Note: if you want to see a more detailed performance analysis, send me an email and I'll send you the tracking spreadsheet.

Name

Ticker

Initial

Current

% Return

S&P 500

S&P Ret.

General Electric

GE

$14.92

$20.04

34.3%

1195.19

17%

Manitowic

MTW

$11.37

$15.74

38.4%

1257.08

11%

Terex

TEX

$16.86

$25.85

53.3%

1257.08

11%

Whirlpool

WHR

$49.41

$78.46

58.8%

1236.47

13%

Bank of America

BAC

$5.20

$9.20

76.9%

1219.66

15%

Citigroup

C

$26.03

$36.47

40.1%

1219.66

15%

Hartford

HIG

$16.80

$21.74

29.4%

1265.33

10%

MFC Industrial

MIL

$6.75

$7.60

12.6%

1265.33

10%

USG

USG

$10.16

$17.08

68.1%

1257.6

11%

Mueller Water

MWA

$2.44

$3.31

35.7%

1257.6

11%

Avg.

44.8%

Avg.

12.3%

#1 Real estate is poised to rebound, and sooner rather than later.

Don't listen to real estate doomsayers who try to frighten you with things like supply/demand imbalances and the big nasty known as "shadow inventory." It's all a bunch of hooey. With all due respect to academicians like Robert Shiller, the key with real estate is not inventory, it's price. There is a certain price point at which animal spirits get unleashed, and my guess is that such levels have already been reached.

In my area, San Diego, prices are ridiculously low. In what is arguably the most beautiful place on the planet, you can buy homes so cheaply that you can immediately generate sizeable positive cash flows from rents with only 5% down. I've noticed a distinct uptick in buying interest in my area, something that isn't unique to San Diego, according to recent reports. RE/MAX says, for example, that prices rebounded by double-digits in February in many of the areas hardest hit by the credit crisis, such as Miami and Orlando and Phoenix.

The nascent momentum in real estate should pick up steam as the year progresses, providing a nice boost to stocks levered to the sector. Three of the Top Ten picks will benefit from a rebound in real estate - Whirlpool, Mueller Water, and USG. Of the three, Mueller Water offers investors the greatest potential for additional price appreciation.

#2 Growth in emerging countries is leading the way in this cycle, led by a massive infrastructure buildout that will last into the decade and beyond.

You don't have to invest in Top Ten picks such as Terex, Manitowoc, General Electric, or MFC Industrial to play the infrastructure buildout theme - although each remains a compelling buy at current prices. There are lots of reasons to be optimistic on infrastructure stocks for the long-term, not the least of which is the undervaluation of most infrastructure stocks.

If you don't want to take the time to research the worldwide buildout theme, at least listen to quarterly conference calls from the likes of Caterpillar or General Electric. Not only will you hear about rapid growth in emerging economies, but you'll quickly realize just how powerful and long-lasting this trend promises to be. Orders and backlogs and reports from the field all suggest that this theme is still in its early days.

#3 Financial stocks have been crushed beyond reason, and will easily outperform the major indices in this cycle.

If you didn't get in on the financials on the Top Ten List - Bank of America and Citigroup and Hartford - there is still plenty of opportunity. Each of these three stocks is still worth buying, as are most financials. In fact, there is a veritable treasure trove of bargains throughout the financial sector, especially among the regional banks.

The easy way to invest in regional banks is via a fund or ETF that focuses on the sector. That said, the purpose of my ongoing columns is to provide investors with specific stock ideas. Along those lines, I'll be recommending a regional bank (or two) in my next column, to be posted within the next few days. It'll be my first new recommendation since the Top Ten List was published in December.

Source: The Key To Outperformance