2018 Stock Picks
I'm about to praise my own stock-picking prowess to the heavens, but before I do, a little background is in order.
I have been trading and managing money for 30 years. I'm still a stock picker at heart, but now I only do it for my own account, my family, and for consulting clients who ask me to pick stocks for them.
I do not claim to have a special gift for spotting the next Google or Amazon. I don't have a crystal ball. I've been lucky, and picking winning stocks requires a healthy dose of luck. I've managed to beat the market by an average of 12.4% per year over the last 10 years.
My Track Record
But my track record isn't all due to luck. I do have a system, and it's been working since 2008. The problem, of course, is that any system can stop working at any time and without warning. I'll explain how my system works in a minute, but first take a look at the results of my picks from 2008 (the first year I published them) to 2017.
In 2017, my picks were up 13.2%, versus 19.4% for the broad market. 2017 was the first year that my picks failed to beat the broad market. (I'm taking the liberty of calling 2016 a tie, since the difference in performance was only one-half of one percent)
In addition to luck, my success with picking stocks is also due to a strict methodology that I follow - no matter what. I don't just throw darts at the Wall Street Journal stock tables. There's a method behind what I do. But anyone who beats the market repeatedly, as I have done for eight of the last ten years, must have a certain amount of luck on his or her side.
Now let's move on to the issue of how I arrive at my stock picks. For the last ten years I have published a list of stocks that I thought would be solid performers over the following 12 months. Finding these stocks is a matter of filtering the universe of available stocks using three different criteria. Here's a quick review:
Starting with a universe of 8,000 stocks, I first screen 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 narrows the list of candidates to about 900 names.
Next, I cross-reference 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 400.
Lastly I run the surviving names through the Thomson Reuters research screen, and keep only the names that scored at least an 8 on their 10 point scale. This screen consolidates 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 in each of the stocks over time.
The 10 stocks that made it through all three of these screens for 2018 appear below.
The advantage of using this three-step screening process is that each screen 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 can be a reasonable addition to your own watch list, as long as you do your own due diligence. I do not recommend that anyone blindly follows my picks - always do your own research.