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This should prove to be a good study of professional prognostication. Last December, Fortune Magazine predicted the best stocks to hold in 2008, directing investors to ten specific stocks the magazine thinks will perform well this year.
How are these stocks holding up so far, compared to the indexes? The S&P 500 Index is down 5.46%, the Nasdaq is down 9.21%, and the Dow Jones Industrials Average is down 3.32%.
Annaly Capital Management (NLY). “It buys mortgage-backed securities issued by government-sponsored enterprises like Fannie Mae and Freddie Mac…” Down 5.5%.
Berkshire Hathaway (BRK.B). “Warren Buffett knows how to exploit panics.” Down 9.73%.
Dick’s Sporting Goods (DKS). “Dick’s emphasizes a store-within-a-store sales approach. Each department has its own look and staff, which appeals to the enthusiast who purchases a lot of sporting goods.” Down 4.43%.
Electronic Arts (ERTS). “Still, if there’s one tech niche that should be immune to a slowdown, it’s videogames… It’s now the No. 2 developer of Wii games, behind only Nintendo.” Down 10.87%.
Genentech (DNA). “Even with the FDA setback, Genentech is still expected to grow earnings 18% next year.” Up 7.22%.
General Electric (GE). “Immelt has sold off laggard operations such as insurance and plastics, putting more emphasis on manufacturing and infrastructure businesses. The timing has been excellent.” Down 12.44%.
Jacobs Engineering (JEC). “in a slowing economy, you want to own companies that can demonstrate superior earnings growth regardless of what’s happening around them.” Down 6.89%.
Merrill Lynch (MER). “Yes, Merrill’s shares deserved a punishment for the firm’s mortgage-related bungling. But the public flogging has far exceeded the transgression, which is why smart investors should buy this stock before everyone else comes to their senses.” Down 12.38%.
Petrobras (PBR). “Petrobras is cheap enough, at 16 times earnings, that it can be a winning investment…” Up 11.78%.
St. Joe (JOE). ”... [W]hen Florida real estate does rebound, investors will be kicking themselves for not recognizing today’s $28 stock price for St. Joe Co.” Up 12.56%.
In general, these picks have shown poor performance this year, but 2008 isn’t over yet.
[Fortune Magazine: The Best Stocks for 2008, December 12, 2007.]
April 23rd, 2008 at 10:01 am
Everybody can pick good stocks in a bull market.
When the market is down, nobody can pick good stocks. Those who can are simply lucky.
April 23rd, 2008 at 10:25 am
I don’t know how bad those picks are. If you bought equal weighting of all of them, by my calculations, you would be down about 3.07%, which is better than the NASDAQ by a wide margin, the Dow by a narrow margin, and the S&P by a significant enough margin. For most people, their goal is to “beat” the S&P in any given year – and this cohort of stocks does do that – right now.
April 23rd, 2008 at 11:42 am
Travelin Man beat me to the punch! :)
April 23rd, 2008 at 11:50 am
I think making short-term predictions is unwise. Perhaps if they had said “Best Stocks for the next decade” I would pay more attention.
April 23rd, 2008 at 11:57 am
The Travelin’ Man is right that these have done well in relative terms, but I often wonder when I see lists like this, or things like “the #1 stock of the year”, etc if you wouldn’t do better to short all such recommendations.
April 23rd, 2008 at 12:20 pm
Not that professionals are that great at picking stocks, but the writer of the article certainly doesn’t have access to all the same information that institutional investors do. By the time the issue went to print, any “best stock” has already been bought and bought again by fund managers – meaning it’s overpriced or at least not as attractively priced as it was before. Factor in transaction costs, and these top picks are almost always benchmark-laggards.
April 23rd, 2008 at 1:00 pm
I have never trusted Forture stock picks. They never look good to me, but they get a lot of attention.
April 23rd, 2008 at 2:16 pm
Fortune doesn’t generally have a great record of picking stocks – or they just choose an appropriate date in the year when the stock was at its highest. Their articles are great though, so I guess good writers don’t make great stock pickers?
April 23rd, 2008 at 10:01 pm
I call bullshit on this article and premise. Travelin’ Man is correct, these picks beat the benchmark indexes, which is really all you can shoot for in a rough market when making broad picks. I don’t know who “Flexo” is, or for that matter what the hell this website is and does, but I am certain I won’t be back. A little research goes a long way. But I suppose it’s easier to just blog the first idea that pops in one’s head.
barry
April 23rd, 2008 at 10:07 pm
Barry: What premise did you have a problem with? All I’ve done is report a: Fortune’s predictions and b: the stocks’ performance so far. Nowhere did I make any statement other than the stocks have generally performed poorly so far… so have the indexes… so what?
April 24th, 2008 at 11:13 am
Lily, I disagree. It was once true that institutional investors always had an access to more and better information than the average amateur, but the information age has changed all that. There are MANY situations where the small investor has a massive information advantage over the Wall Street analysts and institutions. Wall Street and institutions only pay attention when something big happens. It generally takes them months if not years to catch on to many of the smaller companies, during which time the amateur can make a killing. And when it comes to the mega-caps, everybody has the same information. Institutions have no advantage. Unfortunately, this also means you aren’t likely to beat the market buying them because it’s nearly impossible to have an edge.
April 24th, 2008 at 6:08 pm
I got tired of following the stocks and the picks when I ran into and am curious what everyones thoughts are on investing in Life Settlement Insurance policies? Obviously there are some crooks out there but it was the credibility of Warren Buffett that got me really going with it and now I’m both invested and marketing them. I just can’t find anything better, anyone have good/bad/indifferent thoughts on it?...
April 24th, 2008 at 11:23 pm
IMO, these money magazines are the worst places to pick stocks. Even wall street analyst can make the wrong predictions. And these folks are merely “finance journalist”.
Besides, 10 stocks does not have enough diversification. If these magazines want to do a proper job, at least recommend 30 or more stocks. And tell us when to sell, not just what to buy in the January issue.
April 25th, 2008 at 2:19 pm
Kyle, I agree and disagree. :)
I agree that amateur investors can do just as well as professionals. However, my original point is not about amateur investors – but about financial journalists. By the time that a magazine publishes a “best stock ideas” article, both institutional and retail investors have already seized on any opportunities. My point is that no one can do well if they solely follow the advice of mainstream magazines.
“There are MANY situations where the small investor has a massive information advantage over the Wall Street analysts and institutions.”
It may be true that now, more than ever, the amateur investor has access to vast amounts of information. But when you have an army of research analysts, you’re going to come out ahead. Institutions do have armies of research analysts; amateur investors don’t. Mainstream financial magazines certainly don’t.
Moreover, besides just finding information, professionals (the good ones, anyway) know what to do with information. Pick 10 amateur investors at random – how many do you think will know how to run a DCF analysis? How many would even know what “DCF” stands for without resorting to Google?
“Wall Street and institutions only pay attention when something big happens. It generally takes them months if not years to catch on to many of the smaller companies, during which time the amateur can make a killing.”
It may be true that Wall Street only covers a slice of the market. But there are a lot of smaller companies, and not all of them are winners. Amateurs can make a killing if they make the right pick, but that, as Jim Cramer would say, requires them to Do Their Homework. The average investor is unwilling or unable to put in the time to find hidden gems.
Now, to my original point that financial magazines suck as sources of investment ideas, look at Fortune’s list. All of them are recognizable and heavily traded names. None of them are the smaller companies with which amateurs can make a killing.
“And when it comes to the mega-caps, everybody has the same information. Institutions have no advantage.”
Not true at all. Institutions have relationships with mega-caps. They get to ask questions during earnings calls and have lunch with CFOs. Amateur investors must rely on transcripts, SEC filings, and other public information.
This advantage does not mean that professionals will always outperform amateurs, and they certainly don’t always outperform. But professionals do have an edge.
I prescribe to the school of thought that most amateur investors should just stick to broadly diversified index funds. I do know a couple of amateur investors who are fantastic short- and long-term stockpickers. But they’re rare – and they certainly don’t rely on Fortune Magazine to make their picks.