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You can't stop reversion to the mean. Starting in 2003, my picks of the ten best stocks for the year ahead beat Standard & Poor's 500-stock index by a wide margin -- an average of 18 percentage points each year. Alas, in 2007, the law of averages caught up with my track record, and I trailed the S&P 500 by about four points. Undeterred, I'm back.
Four caveats
For ten years since 1995 (I took a brief hiatus that happened to coincide with the market's collapse at the beginning of the century), I have offered readers of the Washington Post and now Kiplinger's ten stocks for the year ahead, selected from the choices of experts I respect.
I've done pretty well at this game, but before I list this year's picks, here are four warnings:
Although I usually object to any stock-investment strategy with such a short time horizon, these companies are chosen for their likely performance over the next 12 months.
While the companies vary by sector and size, they are not supposed to represent a diversified portfolio.
Beware of volatility -- I am not aiming here for safety. The 2007 list produced two stocks that gained more than 50% each and one that lost a whopping 69%.
I don't guarantee success. Follow up this advice with your own research before taking the plunge.
Top picks
The Prudent Speculator is one of my favorite newsletters. John Buckingham, who took over when Al Frank died in 2002, has carried on the tradition of searching for undervalued stocks with good balance sheets. Buckingham likes Air France-KLM (symbol AKH), whose management has been boosting profits by applying operating efficiencies to formerly state-run airlines. "A little-known fact," writes Buckingham, is that "Air France has a 30% share of the Asian market and plans to expand capacity in the region 8% a year for the next three years." It's an inexpensive way to make a bet on a rising Europe and on developing markets.
Jay Weinstein, of Oak Forest Investment Management, in Bethesda, Md., has picked the best-performing stocks on my list in recent years. In 2005, his choice of Atrion, a medical-products company that specializes in intravenous fluid-delivery systems, returned 57%. In 2007, he chose Atrion again, and it returned 49% to December 10. In 2006, his pick, Astronics, returned 59%. For 2008, he's once more going with Atrion (ATRI), which he says is "still the best value for the dollar" and "a strong buy." The company is debt-free, and its price, says Weinstein, is about 15 times estimated earnings for the year ahead. Keep in mind that Weinstein's firm owns a lot of the stock, that the stock is up by a factor of about ten for the millennium, and that, with a market capitalization of just $220 million, it's highly volatile.
One way to take advantage of the stock-picking prowess of Warren Buffett is to buy shares of his company, Berkshire Hathaway, which have risen by about one-third in the past 12 months. Another is by buying what Berkshire is buying. Last year, that included a new purchase, CarMax (KMX), which sells used cars in 86 superstores. At last report, Berkshire owned about 6% of CarMax, an investment of just $300 million. I wouldn't be surprised if Buffett eventually wanted the whole thing.
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