For the fourth year in a row, the performance of my annual list of stock picks was -- well, there's no better word for it -- spectacular. And I keep getting better. Most years since 1995 (I took a hiatus for three years), I have offered readers of the Washington Post and now Kiplinger's ten stocks, selected from choices of experts whom I respect. The list for 2006 returned 33% for the 12 months ended January 1, including reinvested dividends, compared with 16% for Standard & Poor's 500-stock index. It was my second-best margin over the benchmark. (View returns for each of my 2006 stock picks.) The 2005 list beat the S&P by 18 percentage points; the 2004 list beat it by 11; the 2003 list, by seven. It's time to try again.
Three disclaimers. First, stocks are chosen for their likely performance for the year ahead, even though I strongly object to any stock-investment strategy with such a short time horizon. Second, while the companies vary by sector and size, they are not a diversified portfolio. And third, no guarantees of success. Oh, and one more thing. Last year's list was hugely volatile. Two stocks more than doubled, and two others gained at least 48%, but four fell in price. Avoid putting too many of your eggs in any of these individual baskets.
Return to the limelight
Jay Weinstein, of Oak Forest Investment Management, in Bethesda, Md., my guru for undervalued, ultra-small companies, in 2005 picked Atrion (symbol ATRI), a medical-products company, and it jumped 57%. For 2006, he chose Astronics (ATRO), only one letter away, and it rose 60%. Now, for 2007, he's back to Atrion. "Chief executive Emile Battat and his chief financial officer, Jeff Strickland, have done a phenomenal job building shareholder value," Weinstein tells me. He sees Atrion ending 2007 with no debt and $6 a share in earnings. So at current prices you are paying a multiple of 13 times earnings -- puny for a company growing at better than 15% annually. Weinstein reveals that his clients own a big chunk of the stock. But with a market capitalization (shares outstanding times the stock price) of just $145 million, the share price is apt to be volatile.
Last year, I said Tom Brown "is probably the best financial-stock analyst in the business." After the performance of First Marblehead (FMD), which returned 152% (best on my list for 2006) and which, by the way, Brown still likes, I am going to drop the "probably." For the year ahead, one of the holdings of Brown's hedge fund jumps out: CompuCredit (CCRT). The company focuses on the subprime lending market, issuing credit cards, auto loans, and small "payday" advances to people without the best creditworthiness. CompuCredit is a smart operator in a tough business. "Earnings growth and profitability have been strong -- and figure to stay that way," writes Brown, but "CompuCredit's stock trades at an extremely low valuation" -- just eight times the $4.60 in earnings per share that Brown expects in 2007.
I have rhapsodized over Hennessy Cornerstone Growth, a mutual fund that follows a stock-picking formula that screens for rising earnings, a low price-to-sales ratio and above-average stock-price increases. The fund has returned an annualized 17% over the past five years. Its low price-to-sales criterion means that an abundance of retailers and energy companies qualify for the portfolio, so I prefer to look for stocks in other sectors. One of the best is Emcor Group (EME), which designs, operates and maintains sophisticated electrical and mechanical systems for factories, utilities and office buildings. The stock is pricey, but growth is impressive, with profits expected to rise by one-third in 2007.