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7 ways to build on success in 2005
Readers who bought and held my picks would be up about 12% in 2004, thanks to some big winners -- such as Martha Stewart Living -- and a few stinkers. Here's what I learned.
By Michael Brush
In the financial media, nearly everyone has an opinion about stocks and the market. But how good are those opinions?
To find out, at least in my case, I took a look at my picks for 2004. Here's a quick summary of what I found. - If you had bought and held every position suggested in my columns in 2004, you'd be up 12%. That's 3.3 percentage points more than the Standard & Poors 500 Index's ($INX) 8.7% gain during the same time. And it beats 68% of the 15,341 managed mutual funds out there for the same period, according to Morningstar.
- Of the 215 stock positions I recommended, 70% produced gains. Half were up more than 10% and 53% had a gain that beat the S&P 500s 8.7% return through Dec. 22.
- Columns for half the months produced gains of better than 16%, with the best month, January, posting gains of 51%. My columns from eight months of the year outperformed the S&P 500.
- Twenty-eight columns produced positive returns, and 14 posted negative returns.
To calculate these returns, I took the midpoint price of each stock on the day my column ran, and then figured returns on the basis of the midpoint on Dec. 22. I excluded trading costs and dividends. I also omitted several columns that didn't offer stock picks, and three columns from December because they're so recent.
I assume readers follow my stocks on their own after they take positions, as any responsible investor should. So my columns don't come back and tell people when to sell. This presents a challenge in calculating returns. To deal with this, I made the assumption that people simply buy and hold. However, many investors set limit orders to sell stocks whenever they decline by a significant amount, to protect themselves. Limit orders trigger a trade when a stock reaches a predetermined level. Limit orders that protect against declines are called stop-loss orders.
If you assume stop-loss orders set to become active after a 20% decline in a stock, my performance goes up to 15% from 12%.
Those are decent returns, but any review isn't complete unless you learn something about what worked and what didn't so you can do better next year.
Here are the highlights.
Insiders point the way to good returns
As you might expect, taking the lead from insiders who are buying produced some of my best results. Six of my top 20 picks were first discovered because of strong insider buying, producing gains of anywhere from 60% to 85%.
They include: Lions Gate Entertainment (LGF, news, msgs), which I wrote about June 9; Harvest Natural Resources (HNR, news, msgs), which I wrote about Jan. 14; Famous Dave's of America (DAVE, news, msgs) and Rubio's Restaurants (RUBO, news, msgs), both of which I wrote about June 16; and Candie's (CAND, news, msgs), which I wrote about July 21.
| Brush's top 20 picks for 2004 | | Company (ticker) | Price when picked* | Price Dec. 22* | Return | Column | | Cheniere Energy (LNG, news, msgs) | $14.00 | $63.50 | 353.57% | 10 stocks to protect you if oil prices spike | | Delta Air Lines (DAL, news, msgs) | 2.90 | 7.65 | 163.79% | Follow the dinosaurs to airline profits | | Martha Stewart Living Omnimedia (MSO, news, msgs) | 12.50 | 28.00 | 124.00% | Watch for Stewart bombshells -- and profit | | Alliance Resource (ARLP, news, msgs) | 34.50 | 73.50 | 113.04% | 7 low-risk cash cows yielding 6% | | Avanir Pharmaceuticals (AVN, news, msgs) | 1.64 | 3.40 | 107.32% | 5 bargain stocks trading under $5 | | Delta Petroleum (DPTR, news, msgs) | 7.85 | 15.20 | 93.63% | 10 stocks to protect you if oil prices spike | | Candie's (CAND, news, msgs) | 2.64 | 4.90 | 85.61% | 5 bargain stocks trading under $5 | | Telkonet (TKO, news, msgs) | 3.14 | 5.60 | 78.34% | 5 great stocks the pros haven't found yet | | Genitope (GTOP, news, msgs) | 9.50 | 16.80 | 76.84% | 5 biotechs on the edge of cancer breakthroughs | | Stolt Offshore (SOSA, news, msgs) | 3.48 | 6.15 | 76.72% | 5 bargain stocks trading under $5 | | Rubio's (RUBO, news, msgs) | 7.57 | 12.38 | 63.54% | Restaurant insiders dine off the value menu | | Famous Dave's (DAVE, news, msgs) | 7.83 | 12.75 | 62.84% | Restaurant insiders dine off the value menu | | Hub Group (HUBG, news, msgs) | 32.00 | 51.90 | 62.19% | Family-size returns, without the drama | | Harvest Natural (HNR, news, msgs) | 10.90 | 17.50 | 60.55% | 10 stocks to protect you if oil prices spike | | Lions Gate (LGF, news, msgs) | 6.63 | 10.61 | 60.03% | Wanna be in pictures? Try Lions Gate | | QLogic (QLGC, news, msgs) | 22.50 | 35.25 | 56.67% | 10 cash-is-king stocks from a value expert | | eResearch Technology (ERES, news, msgs) | 28.69 | 14.20 | 50.51% | Rules still shield insiders who bail out | | William Wrigley (WWY, news, msgs) | 59.95 | 89.40 | 49.12% | Family-size returns, without the drama | | Alliance Imaging (AIQ, news, msgs) | 7.35 | 10.90 | 48.30% | 5 small stocks with big profits just ahead | | Orbit International (ORBT, news, msgs) | 8.43 | 12.50 | 48.28% | 12 stocks for the recovery's next phase |
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*Price at midpoint of daily trading
But insiders also put me into some of my biggest losers. Strong buying at Creative Bakeries (CBAK, news, msgs) in the summer, for example, looked like an endorsement of a turnaround in progress. Instead, it led to my worst disaster for the year, a 76% plunge. Another big loser was a May 26 column based on insider buying in tech stocks. Those picks have sunk 33%.
So how do you tell the good insider buying from the bad? I don't know if there's a clear answer to that question. But one thing that helps is when you add in another buy signal, such as when analysts are boosting earnings estimates. Combined with insider buying, positive estimate revisions led to excellent results for Goodrich Petroleum (GDP, news, msgs), which I wrote about Sept. 22, as well as Delta Petroleum (DPTR, news, msgs) and Harvest Natural Resources (HNR, news, msgs), both of which I wrote about Jan. 14. They were up 40% to 94%.
One key takeaway: Sometimes when insiders sell, they're just selling to raise money for college tuition or a new house, not because they think the stock will decline. My March 24 column predicted declines in retailers like American Eagle Outfitters (AEOS, news, msgs) and Starbucks (SBUX, news, msgs) where insiders were selling. It produced losses of 28%.
Chief executives know where to go for good results
Whenever I talk to a chief executive, I always ask what other companies look like strong performers. To be sure, many of these leads don't pan out. But they can produce phenomenal results. My best performer, Cheniere Energy (LNG, news, msgs), up 353% since I put it in a Jan. 14 column, came as a suggestion from the CEO of another small energy company. So did my 10th best pick, Stolt Offshore (SOSA, news, msgs), up 77%.
Identifying stocks that fit into macro themes pays off
In January, it seemed pretty clear that oil prices might soon climb because of tensions in oil-producing areas. Ten stocks I identified as potential winners in this scenario were up 63% by the end of the year.
But it's not good to get too cute in trying to find stocks that fit broad consumer or cultural themes. Companies that were supposedly the strongest advertisers during the last Super Bowl, a column theme in January, lost 11%. The same thing happened with meat stocks, which were supposed to benefit from the Atkins diet. Stocks in a June column on this theme lost 12%.
Go long when there's turmoil at the top
It doesn't happen often, but 2004 proved once again that when a CEO whose name is on the company door gets into embarrassing legal trouble, it pays to buy the stock's dip. Ultimately, Americans love to forgive, or overlook, shortcomings. That's the reasoning I followed when I suggested in January that readers pick up shares of Martha Stewart Living Omnimedia (MSO, news, msgs) as Stewart was about to go on trial for allegedly misleading investigators looking into possible insider trading. It was my third-best pick for the year, up 124%. The same thing happened with shares of Steven Madden (SHOO, news, msgs) in 2000 after then CEO Steve Madden was charged with stock fraud and money laundering.
Get help from top money managers
Several money managers helped throughout 2004, but one who stands out is John Buckingham. He runs The Al Frank Fund (VALUX, news, msgs), which is up 16.8% on an annualized basis in the last five years, according to Morningstar. He also writes The Prudent Speculator newsletter, ranked No. 1 for long-term results by Hulbert Financial Digest. Buckingham suggested 10 cheap and cash-rich companies in an August column. Those stocks have produced 20% gains since then. Not all of Buckingham's picks are winners. Two of my biggest losers, Pfizer (PFE, news, msgs) and Merck (MRK, news, msgs), came from Buckingham. They're each down around 28% since first appearing in my columns. Buckingham, a long-term investor whose average holding period is more than six years, still holds these stocks and believes they'll climb.
It's too soon to call, but top picks from Morningstar's research department show promise just a few weeks after being featured in this early December column. The stocks are up 6.3% compared to 2.5% for the S&P 500.
You can do well by doing good
An advocacy column I wrote in April took insiders to task for using hedges to sell shares in a manner that keeps those transactions off the radar screens of many investors. The column suggested shorting Tyson Foods (TSN, news, msgs), Knight Trading Group (NITE, news, msgs) and eResearch Technology (ERES, news, msgs) because of this stealth insider selling. Investors "short" stocks by borrowing shares and selling them, hoping to buy them back at cheaper prices to return them to the lenders and pocket the difference in their selling and buying prices. As of Dec. 22, the three shorts in the column fell enough to produce 22.5% gains. At their extreme lows after my column, Knight and eResearch dropped 38% and 45%, respectively.
Stock promoters aren't all bad
To be sure, many, many stock promoters are sleazebags ready to cheat you. They'll pump stocks and leave you holding the bag when the stock plummets after their promotion stops. So you always have to be very careful with paid promoters.
"I always question the objectivity of any research that is paid for," says John Reed Stark, who has hunted down more than a few overseas scam artists as the chief of the Securities and Exchange Commission's Office of Internet Enforcement.
On the other hand, stock promoters have bills to pay, so the last thing some of them want to do is put themselves out of business with a bad reputation. The good ones are regularly approached by companies looking to hire them. These promoters try to pick the best clients, so they look good, too. Why not take advantage of this natural screening process?
Four leads I used from stock promoters in 2004 on the basis of this logic produced some of my best results. They were Avanir Pharmaceuticals (AVN, news, msgs) and Delta Petroleum (DPTR, news, msgs), up 103% and 94%. These two came from a stock promoter who prefers to remain anonymous.
Next, Telkonet (TKO, news, msgs), a small broadband over electrical wiring play, has posted 78% gains since I put it in an April column. That one came from Jody Janson, a Rochester, N.Y.-based stock promoter whose Investors Stock Daily accepts money from Telkonet to promote the stock. Finally, Geoffrey Eiten of OTC Research suggested the tiny Solucorp Industries (SLUP, news, msgs), up 26% since I featured it in a late September column on environmental stocks. Another pick from him, however, has produced similar losses so far. Tiny Collectible Concepts Group (CCGI, news, msgs) is off 24% since it was featured in a November column on pink-sheet stocks.
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