2015 Should Be A Great Year For Stock Picking

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Includes: AAPL, BAMXF, BMWYY, BRK.A, BRK.B, CSCO, CTTAF, CTTAY, DDAIF, DMLRY, EWG, GILD, GOOG, GOOGL, GS, INTC, JPM, MU, RCKZF, SLB, VLKAF, VLKAY
by: Claudio Brocado

Summary

Focus increasingly on bottom-up stock picking.

Companies with superior long-term fundamentals should be core of the portfolio.

The German stock market presents a growing number of opportunities.

I expect 2015 to be a great year for stock pickers. Still, I would advise long-term investors to be more bottom-up oriented and emulate Warren Buffett in buying companies with bright fundamentals offering sound long-term value. I continue to concentrate the core of my portfolio in stocks with superior free cash flow generation, particularly those which sport a high free cash flow yield. I pay significant attention to companies whose return on invested capital (ROIC) substantially exceeds their weighted average cost of capital (WACC).

Other characteristics that I look for in companies I add to my core portfolio include a great purposeful corporate culture and better than average corporate governance, a strong alignment between the interest of controlling shareholders (if they have them) and minority shareholders.

While the general preference is still for companies which return a meaningful portion of the cash they generate to shareholders, the market is now increasingly rewarding those who are putting their cash back to work. In cases where I have a high level of trust in the management, I am also applauding them when they are reinvesting in growth.

The still generalized sense that the global economy is not doing well is allowing more astute managements to take advantage of extraordinary long-term investment opportunities. I am increasingly convinced that companies with strong managements and a competitive moat that invest in growth now will tend to do particularly well in the intermediate term.

While my focus is increasingly bottom-up, I cannot afford to ignore the macroeconomic (and geopolitical) headwinds. Actually, in what I continue to call the most hated secular bull market of my career, I see the selloffs periodically caused by macro worries as catalysts for adding to individual stock positions, particularly when my favorite companies fall victim to market-wide swoons.

The following section was not originally in my note. I enjoy talking about markets and trends (particularly if I can find issues that do not seem to be sufficiently covered elsewhere), but do not like to be pinned down on individual stock picks for a relatively short period of time. Since I consistently say nobody should invest any money in the stock market that one will need within the next five years, my implied investment time horizon is five years (or more).

Additionally, I think something like '2015 picks' is a folly due to the end point sensitivity of stock picks for a year. The arbitrary nature of the calendar year means that the results may be quite different on December 20, 2014, December 31, 2015 or January 5, 2016, which may be exacerbated by 'window dressing' effects. That said, the Seeking Alpha editorial staff requested that I include some stock examples in my note, so here is my list. I do not claim that they will be 2015 outperformers or that all of them will necessarily meet many (let alone most) of the characteristics I look for in individual stocks. That said, I do think they are great companies and stocks that should outperform in the long run.

My list is by design not sufficiently diversified, as I do think technology and financials remain very attractive. Energy would be an extremely contrarian sector pick, though I include only one related name. Companies whose stocks I particularly like at current prices include Intel (NASDAQ:INTC), Cisco (NASDAQ:CSCO) Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), JPMorgan (NYSE:JPM), Google (NASDAQ:GOOG)(NASDAQ:GOOGL), Goldman Sachs (NYSE:GS), Schlumberger (NYSE:SLB), Micron (NASDAQ:MU) and Gilead (NASDAQ:GILD). A perennial favorite of mine (and still by far my top holding) is Apple (NASDAQ:AAPL), though I do not specifically include it as a 2015 pick.

A part of the world where macro headwinds have created particularly intriguing individual stock buying opportunities is Europe in general, and Germany in particular.

Getting back to a top-down call, I would argue that the German equity market now generally provides substantial opportunities. My focus here is also increasingly bottom-up, but I want to highlight that recent economic data are scaring global investors away from the German market.

Intriguingly, the DAX (arguably the benchmark for German 'blue chips') is a particularly volatile stock market index. The German economy, admittedly not quite strong of late, is nonetheless not that volatile. Still, the DAX is generally viewed as a cyclical index. At the same time, however, many of the companies in the German benchmark are not overly exposed to the domestic economy. This may actually explain the index's high volatility in light of the relative stability of the German economy.

The recent significant weakness in the euro vis-a-vis the US dollar will provide a tailwind to German corporate earnings. German exporters who managed to thrive with the euro at $1.40 are becoming even more globally competitive. My original note did not include individual names, but again at the request of the Seeking Alpha editorial staff, here are a few suggestions.

The caveats I noted along with the list above applies even more here. I am even less of an expert on the German market than I am on the US. In Germany, I would consider a basket of auto and auto-related companies, including Volkswagen (OTCPK:VLKAY)(OTCPK:VLKAF), Daimler (OTCPK:DDAIF)(DDAIY), BMW (BAMXY)(OTCPK:BAMXF) and Continental (OTCPK:CTTAY)(OTCPK:CTTAF). I recently wrote a note on the Berlin start-up scene. The key stock play on that trend would be Rocket Internet (ROKT). Of course, an even more diversified, single bet on Germany, Inc. (Germany AG) would be the iShares MSCI Germany ETF (NYSEARCA:EWG).

Whether you focus your equity investments in the US, Germany, or Latin America (or if you happen to be more of a global investor), use the periodic selloffs caused by macro scares to add to positions in companies you know well. Having a long-term investment horizon (the longer, the better) that allows you to engage in time horizon arbitrage (THA, as explained in my 'tech bubble' note from December 19) is the best investment recommendation I can give.

Alternatively, to the extent you can dollar cost average into a diversified basket of global blue chip stocks and reinvest the dividends, you are likely to increase your chances of substantial wealth creation over a lifetime of equity investment without any attempt at market timing.

Disclosure: The author is long INTC, CSCO, BRK.B, JPM, GOOGL, GS, SLB, MU, GILD, AAPL, VLKAF, DDAIF, BAMXF, CTTAF, ROKT.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.