For the last few years I have published a list of stocks that I thought would be solid performers over the following 12 months. In coming up with this year’s list, I used the same screening process that has worked so well since 2008. Why mess with success? Here’s a quick review:
Starting with a universe of 8,000 stocks, I first screened for the ones that are rated 1 or 2 by Zacks Investment Research. This screen is all about earnings – growth, positive surprises, and upward revisions. This narrowed the list of candidates to about 900 names.
Next, I cross-referenced the Zacks list with Vector Vest’s top-rated stocks (VST score greater than 1). The VectorVest screen looks at price history to determine momentum, and various measures of relative value. This complements the earnings focus of the Zacks screen. The list of candidates that pass both of these screens is down to 388.
Lastly I ran the surviving names through the Thomson Reuters research screen, and kept only the names that scored at least an 8 on their 10 point scale. This screen consolidated the opinions of all the analysts who cover the stocks, and it gives more weight to those analysts who have proven to be the most accurate over time.
The 10 stocks that made it through all three of these screens appear below. As you can see, they represent a variety of sectors and industry groups.
The advantage of using this three-screen approach is that each source focuses on a different aspect of what makes a stock attractive. It’s a Bayesian approach to stock selection. You begin with a prior probability (the Zacks rank has a history of identifying winning stocks), and you further refine the list by adding layers of non-correlated screening criteria.
I didn’t spend months analyzing financial statements and visiting these companies in person. I’m relying on the analyst community to do that for me. My methodology takes into account a consensus of top analysts, and how their earnings estimates have changed over time.
I can be reasonably confident that these are solid companies, producing solid and growing earnings, and they would make great stocking-stuffers for the little investors on your list.
Do what Santa does: make your list and check it twice. And always perform your own due diligence before you invest in any list of stocks, even when they have Santa’s stamp of approval.
(Disclosure: I have long positions in HAR, EBF, JLL)