Be Careful With Top Pick Lists: Some May Not Perform To Expectations

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Includes: AAL, AGN, AMZN, AVGO, BA, BAC, BBBY, CMG, EA, EW, FB, FLR, GILD, GM, GMCR, GOOGL, JCP, KR, LUV, M, MNK, MNST, MU, PYPL, RCL, SODA, TGT, TWTR, UVXY
by: Seth Golden

Summary

Stay flexible when investing and don't marry an idea or investment vehicle if possible.

Be wary of Top Pick lists as they don't always perform as the firm expects.

Maintain a diverse and healthy watch list of stock from which to choose and invest or trade.

I don't find it particularly prudent to assign "top picks" for the new year. In fact, I've never done so in the past and as such I don't plan to do so in the future. It's been my opinion that just because an equity/investment vehicle proved to appreciate in the prior year, that doesn't necessarily mean it will repeat that performance in the new year. Additionally, highlighting "top picks" assumes that is where one's portfolio will dedicate a good portion of investment capital, due diligence and, more obviously, time. Of course, nothing I'm offering at the onset of this article is outside the understanding of many. However and most importantly, the key point I'm making is that investors should always maintain a level of flexibility with their investment strategies that doesn't marry one to any particular investment or investment idea. If there is one thing that I've learned in my 16 years of investing and trading is that maintaining a flexible and actively managed portfolio more often than not exhibits strong capital gains over time. With that said, no; I am not a "buy and hold" investor/trader. Typically, my longest investment period for any equity will be two years with an average holding period of 3-4 months.

Investors can never really tell what will move markets at the onset of a new year, let alone the full fiscal calendar year. But regardless of my aversion to assign top picks, every year hundreds of analysts and media outlets do so in hopes of attracting not only subscriptions and viewers, but big dollars from institutional investors whom are looking for sound research and analytics that is hard to find in a somewhat saturated and robotic research industry. I've read hundreds of research reports over the years and will likely read thousands more in the years to come. In reading such reports I always look for standouts. What I mean by standouts is something that isn't in the pool of analyst coverage for any particular equity being covered. Almost every analyst does the 1,2 and 3-year projection model in their reporting alongside 3-5 paragraphs of what they deem noteworthy fundamental analysis. The issue a price target and a PE ratio while attempting to rationalize it to investors, but beyond these robotic offerings there is often not much else. And with these reports some analysts and financial reporting media outlets assign their top picks every year. For the purpose of this publication were going to take a look back at Barron's Top Picks for 2015 as well as Jim Cramer's to see just how the market moving financial media outlet participants performed for the calendar year.

Barron's offered 10 Top Picks for 2015 and the first one to talk about here will be General Motors (NYSE:GM). Getting right to the point, the stock did not perform as Barron's expected in 2015. The stock entered 2015 at $34.91 and finished the year at $34.01, losing just over 2% on the year, but not too much worse than the overall market.

GM could double its earnings per share over the next three years, and its shares sell for a deep discount to the S&P 500. That's a combination we like enough to keep it as a holdover from last year's Top 10 picks-even though the stock has run over our toes on the way from $39 to $34 since that story was published.

GM could reach $5 a share in earnings as soon as 2016. As that number comes into view over the next year, its shares could rise nearly 50%, to $50. A 3.6% dividend yield adds allure, and payments are likely to grow."

While GM's earnings have remained on course, sales have come in mixed and largely due to the ongoing issues surrounding foreign currency exchange rates. Even with the company taking making share in 2015 and Warren Buffet jumping into the auto sector with share acquisitions of GM, the automaker simply couldn't eek out a gain in 2015 for shareholders. Let's check out the next pick on Barron's list as this one didn't go as planned.

Bank of America (NYSE:BAC) came into the year as a top pick by Barron's under the impression the financial heavy weights stock was being depressed by ongoing litigation related to mortgage securities and, to a lesser extent, currency trading, which led to 2014 earnings per share falling by half, to an estimated 44 cents. But these depressed financial results would improve in 2015 and serve to boost the share price performance of BAC for shareholders of record. Much like the assumptions assigned to GM's share price expectations, shares of BAC didn't perform as assumed by Barron's. Bank of America shares entered 2015 at $17.89 a share and fell to $16.83 by year's end, losing almost 6% on the year and underperforming the market without consideration to the company's dividend yield. With two picks not panning out the way Barron's had planned, let's hope to see something better with the next top pick offered by the firm.

And that next pick on Barron's list was Boeing (NYSE:BA). Congratulations to Barron's because in Boeing they found a winner for FY15 as the stock entered 2015 at roughly $129 per share and finished the year at just over $144 a share. A double-digit positive return on capital in a market that was flat to down YOY showed Boeing as being able to deliver the goods to investors and the marketplace. Here is what Barron's had to offer investors regarding the prospects for the company going into FY15:

In 2014, Boeing shares have lost 4%, even though earnings per share are expected to be up 19%, to $8.38. Investors might fear that lower fuel prices will reduce the financial incentive for carriers to upgrade older planes. Not so far: Last quarter, Boeing's backlog of orders swelled to $490 billion from $440 billion. That represents more than five years' worth of revenue.

Lower fuel prices could actually give Boeing a boost. Carriers buy planes to use for decades. About half of Boeing's orders are replacements, and half are for expansion. Cheap jet fuel allows consumers to spend more on travel, including flights. Earlier this month, the International Air Transport Association predicted that revenue passenger miles, a measure of air traffic, will jump 7% in 2015, up from 5.7% this year, on a boost from cheap fuel.

In addition to the double-digit returns for shareholders through the stock performance in 2015, shareholders also benefited from the company's generous dividend yield of just around 3% annually. All in all, when combined with the first two stock picks offered by Barron's for 2015 and assuming equal weighting of capital investment, investors would be in the black with these three stock picks. So let's move on to Barron's next pick.

American Airlines (NASDAQ:AAL) was another top pick for the financial media giant. After all, Barron's did expect air travel and occupancy to be at peak performance metrics in 2015. Unfortunately and unlike Boeing, American Airlines shares did not perform well despite a rather heavy travel year for both consumers and businesses alike. After shares doubled in 2014, I would have been a little less optimistic concerning the stock price, as the airline industry has historically been an underperforming sector of the stock market. Regardless of the expectations for air travel and the facts surrounding the industry consolidation that has taken place over the last couple of years, the industry is always marred by the way in which the industry operates as well as union issues that plague carriers. While earnings for American Airlines will have risen in 2015, revenues have been a bit of a hit and miss story and for a number of different reasons. As such, the stock did not perform to Barron's expectations in 2015 as the stock price fell by roughly 21.5% and putting Barron's back in the red with its top picks list.

Moreover and rather than continuing on this path of outlining each top pick on Barron's 2015 list with somewhat mundane details, I'll offer the remaining 6 picks and their performance for the year before quickly taking a look at Jim Cramer's results. Barron's 6 additional top picks for the year were, Google (NASDAQ:GOOGL) up 46% YOY, Micron Technology (NASDAQ:MU) down 59% YOY, Macy's (NYSE:M) down 47% YOY, Royal Caribbean (NYSE:RCL) up 22% YOY, Gilead Sciences (NASDAQ:GILD) up 6.6% YOY and Flour (NYSE:FLR) down 22% year-over-year.

It was a pretty rough year for Barron's Top 10 Picks List upon reviewing the results. Even outside of the firm's Top 10 Picks List for 2015, a quick look at Barron's research "picks and pans" throughout the year, results were extraordinarily poor when compared to the overall market. That being said, the firm's list of "short" opportunities did fare much better.

As investors can see, even though some companies actually do perform to the expectations and everything for the company goes as planned if not better, sometimes the stock price doesn't follow the company performance. Dividends can offset some of the stock performance losses, but this is not the case for most portfolios. Not included in Barron's list, as an example of strong corporate execution with an underperforming stock, would be Target Corp. (NYSE:TGT). The retail giant has done nothing but beat expectations all year long and yet the stock fell in 2015 by 3.6 percent. Unfortunately for Target there were much greater concerns surrounding the brick and mortar retail sector than Target could overcome regarding investor sentiment for the retailers stock.

As poorly prognosticating a performance as Barron's had in 2015, a quick look at Mad Money's Jim Cramer top 10 picks for 2015 and we come to find a very different result. While Jim Cramer's antics and mannerisms may be a little off-putting to some, the famed CNBC contributor and reporter had a pretty strong result with regards to his top picks for 2015. Here is his list for consideration:

Southwest Airlines (NYSE:LUV) up 1.5% YOY, Electronic Arts (NASDAQ:EA) up 46.6% YOY, Edward Lifesciences (NYSE:EW) up 23.6% YOY, Allergan PLC (NYSE:AGN) up 20.6%, Avago Technologies (NASDAQ:AVGO) up 45% YOY, Mallinckrodt (NYSE:MNK) down 23% YOY, American Airlines down 21.5% YOY, Keurig Green Mountain (NASDAQ:GMCR) down 31.8%, Royal Caribbean up 22% and last but not least Kroger (NYSE:KR) up 31.6% year-over-year.

While Mr. Cramer certainly had some stinkers on his list, the winners more than made up for the losers. And with that I will finally deliver a top pick of my own for 2016. Just kidding folks. I still believe it is optimal to maintain a large net that can be cast over a broad basket of investment considerations and in an actively managed way. Having said that, I will be maintaining a "watch list" that includes J.C. Penney (NYSE:JCP), Target Corp , SodaStream (NASDAQ:SODA), Monster Beverage Corp. (NASDAQ:MNST), Bed Bath & Beyond (NASDAQ:BBBY), Whole Foods Market (NASDAQ:WFM), ProShares Ultra VIX Short-Term Futures (NYSEARCA:UVXY), Twitter (NYSE:TWTR), Facebook (NASDAQ:FB), Chipotle Mexican Grill (NYSE:CMG) and Paypal (NASDAQ:PYPL) just to name a few.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.