10 Stock Picks For the New Year
By James K. Glassman
The Washington Post
Sunday, January 17, 1999; Page H01
Every January, I have offered readers a list of 10 stocks to consider, culling selections from the choices of analysts whose opinions I value. For the first three years, the lists returned roughly the same as Standard & Poor's 500-stock index, backing up a point that financial scholars make -- a diversified portfolio of about a dozen stocks should perform much the same as the broad market.
But not last year!
Our 10 stocks returned a mere 18.2 percent, compared with 31.6 percent for the S&P 500 and 23 percent for the Dow Jones industrial average. (All figures are for one year, ended Jan. 13.) That knocked our four-year average down to 26.6 percent (still awfully nice) against the S&P 500's incredible 30.6 percent.
What happened? The short answer is that the S&P 500 doesn't tell the whole story for 1998. Jeffrey M. Warantz and John L. Manley Jr. of Salomon Smith Barney Inc. call it "a year of extreme performance divergence by market capitalization strata." The very big stocks (of which our list contained none) did very well, while other stocks ranged from mediocre to terrible.
The Salomon researchers found that stocks with a market cap of more than $20 billion increased in price by 26 percent in 1998, while mid-caps ($2 billion to $5 billion) fell 6 percent and the smallest stocks (less than $250 million) fell 24 percent.
More remarkably, they discovered that, at year-end, 72 percent of stocks were trailing the S&P 500 by more than 15 percent. "In the past," Warantz and Manley wrote, "we viewed a level of over 50 percent as being particularly high. This year, the rules changed."
Put it another way: "If your portfolio trailed the S&P 500 by less than 15 percent," they wrote, "you still managed to outperform 72 percent of all the common stocks you could have chosen for your portfolio." That makes us feel a little better since we trailed the S&P 500 by 13 percent. Indeed, 86 percent of all active money managers failed to beat the broad market average.
And no wonder. Salomon found that two-thirds of all U.S. stocks fell in 1998. Our own portfolio included five losers out of 10 stocks.
So why did the averages look so good? The big guys soared and, since the S&P 500 is weighted by capitalization (that is, the largest stocks have the most influence), they pulled the numbers way up. For example, a mere 10 stocks accounted for 43 percent of the increase in the S&P 500. Microsoft Corp. (symbol: MSFT) accounted for 9 percent.
But big-small divergence wasn't our only problem. As with mutual funds, we picked too many value (or potential bargain) stocks in a year when growth (or super-popular) stocks dominated. We aren't abandoning value for 1999 -- it's coming back sometime -- but our list is better-balanced, both for size and style.
Here, then, is the 1999 list (in alphabetical order) with the usual warnings:
First, I do not believe in owning stocks for only a year, so consider these shares as long-term holdings. In fact, give attention to the 1998 list, too. Second, these stocks are the selections of other analysts -- although, in nearly all cases, I am the one who made the specific choice from a larger list of stocks held or recommended by each. But this is not my own 10-best list and, under The Washington Post's conflict-of-interest rules, I can't own individual stocks. Third, don't run out and buy the whole portfolio. Instead, use the blurbs as a starting point for your own research. Fourth, no guarantees.
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Safeskin Corp. (SFSK): This is a company that makes disposable latex gloves for physicians, scientists and dentists. The stock is down more than half from its July high despite soaring revenue and a return on equity of 30 percent. What's the problem? Timothy Vick, editor of Today's Value Investor (219-852-3230), says analysts worry about cost-cutting by hospitals and about "the company's ability to manage inventories and receivables during this rapid buildup phase." Still, he loves the stock. He sees Safeskin, with a market cap of $1.2 billion, as a takeover candidate with a relatively low P/E -- just 21 for a firm increasing profits at 25 percent a year.
In looking at the finished list, I am struck that my bias for small-caps and for value continues. The 10 stocks are well-balanced, but if history repeats in 1999, don't expect this portfolio to keep up with the S&P 500. My guess is that it's time for the cycle to turn. At any rate, these are all shares for the long haul. Good luck.
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