It’s that time of the year – to make my selections for the list of 10 stocks that I have the most confidence in for the next 12 months. I’m going to use the same methodology, because I think consistency is important when making investment decisions. If one of my selection criteria stopped working, then of course I would change it. But I don’t like to tinker, especially with a system that produces the great results that I’ve been getting since I began this tradition in 2008.
The results from last year’s picks are in, and the list did in fact beat the market (as represented by VTI, the Vanguard Total Stock Market ETF) by a wide margin. That’s not bad, considering the following.
Although I have a knack for picking good stocks, thats not the real value I offer to clients. In fact, I discourage my clients from trying to beat the market by picking individual stocks. Rather, I believe in building diversified portfolios that cover many different asset classes, and then rebalancing periodically. So why do I go on record with a list of stock picks?
One reason is because my clients wanted me to. I think it’s just part of human nature to speculate about which stocks will go up and which will go down. Even though I discourage people from participating in this kind of gambling, I recognize that it’s part of our culture.
So a few years ago I devised a stock picking methodology that remains true to my philosophy of using critical thinking and statistical analysis. I came up with a 3-factor screening model that utilizes very different approaches to the task of price forecasting. The three screens are Zacks earnings estimates, VectorVest fair value and price momentum, and Thomson Reuters consensus analyst forecasts.
By looking at these three very different valuation and prediction methods, I can feel confident that I’m not just falling in line with mainstream thinking. It’s very Bayesian. Start with earnings estimates, surprises, and revisions from Zacks. Then take the best names from that screen and look for price momentum and fair value estimates, and finally take a poll of the entire analyst community to see which names have the best professional sponsorship with institutional investors.
What you end up with is a short list of stocks that have a higher than average probability of performing well over the next 12 months. So without further ado, here’s my list of stock picks for 2012.
Keep in mind that these picks are the result of a mechanical process of screening, not fundamental analysis. If you plan to use this information in your own stock selection process, make sure that you do your own due diligence before pulling the trigger.