I’m about to praise my own stock-picking prowess to the heavens, but before I do, a little background is in order.
I am not a stock-picker. Well, I guess I really am a stock picker, but only for my own account and for coaching clients who ask me to pick stocks for them. I do not claim to have a special gift for spotting the next Google (NASDAQ:GOOG) (NASDAQ:GOOGL) or Amazon (NASDAQ:AMZN). In truth, I have no idea which stocks will beat the market or which will lag. I don’t have a crystal ball. I’ve been lucky, and picking winning stocks requires a healthy dose of luck. I’ve managed to beat the market with my annual picks for eight years running, and it’s as much down to luck as it is to skill.
My Track Record
But my track record isn’t exactly 100% pure luck. After all, I do have a system. And my system has been working since 2008. The problem, of course, is that my system could stop working at any time and without warning. I’ll explain how my system works in a minute, but first take a look at the results of my picks from 2008 (the first year I published them) to 2016.
For 2016 my picks were up 9.0%, versus 9.5% for the broad market. 2016 was the first year that my picks failed to beat the broad market.
Aside from luck, my success picking stocks is also due to a methodology that I stick to – no matter what. I don’t just throw darts at the Wall Street Journal stock tables. There’s a method behind what I do. But anyone who beats the market repeatedly, as I have done for eight of the last nine years, must have a certain amount of luck on his or her side.
Now let’s move on to the issue of how I arrive at my stock picks. For the last nine years I have published a list of stocks that I thought would be solid performers over the following 12 months. Finding these stocks is a matter of filtering the universe of available stocks using three different criteria. Here’s a quick review:
Starting with a universe of 8,000 stocks, I first screen for the ones that are rated 1 or 2 by Zacks Investment Research. This screen is all about earnings – growth, positive surprises and upward revisions. This narrows the list of candidates to about 900 names.
Next, I cross-reference the Zacks list with Vector Vest’s top-rated stocks (VST score greater than 1). The VectorVest screen looks at price history to determine momentum and various measures of relative value. This complements the earnings focus of the Zacks screen. The list of candidates that pass both of these screens is down to 400.
Lastly, I run the surviving names through the Thomson Reuters research screen and keep only the names that scored at least an 8 on their 10-point scale. This screen consolidates the opinions of all the analysts who cover the stocks, and it gives more weight to those analysts who have proven to be the most accurate in each of the stocks over time.
The 10 stocks that made it through all three of these screens for 2017 appear below.
Sharp-eyed observers will notice that this year’s picks have something unusual in common: They’re all “yield plays.” This is a departure from my previous screening process, because I added above-average yield as a 4th criteria in the screening process. Why did I do that? Why change a proven methodology by adding a new criteria?
The answer is that I believe that the stock market will end up at the end of the year very close to where it began. I think it will continue to rally for a few months, but then I expect a correction of 15% or so, followed by a recovery back to the starting point, give or take 3%.
So my thinking is that I would rather invest in yield, so that I can be assured of a 3% or 3.5% return, rather than depending on growth. It’s a departure from my standard process, and I may regret it at the end of the year, but I believe the reasoning is solid.
The advantage of using this four-screen approach is that each screen focuses on a different aspect of what makes a stock attractive. It’s a Bayesian approach to stock selection. You begin with a prior probability (the Zacks rank has a history of identifying winning stocks), and you further refine the list by adding layers of non-correlated screening criteria.
I didn’t spend months analyzing financial statements and visiting these companies in person. I’m relying on the analyst community to do that for me. My methodology takes into account a consensus of top analysts, and how their earnings estimates have changed over time.
I can be reasonably confident that these are solid companies, producing solid and growing dividends based on decent earnings, and they can be a reasonable addition to your own process of picking stocks, as long as you do your own due diligence. I do not recommend that anyone blindly follows my picks – always do your own research.