Markets
Hot Hands, Hot Picks
Profit with seven pros as they lay their cards on the table.
From Kiplinger's Personal Finance magazine, July 2006
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How do you pick a good stock? Ask that question of a random group of investors and you're likely to get a bunch of random answers. But ask a carefully chosen group of highly successful stock pickers and you'll get a great education about what is really important in investing -- not to mention some terrific stock picks.
That's exactly what we did. We sought out seven veteran investors with superior short- and long-term records and asked them to share their best investing ideas with us. Each has a different approach, so it is worth noting when some of them arrive at the same conclusions. Cement, home-building and energy stocks, for example, came up more than once. And it should come as no surprise that these veterans are willing to buy in sectors that other pros shun or ignore. That's where the best opportunities lie.
Ride overseas tailwinds
Small company or large, growth or value, Rudolph-Riad Younes makes investing overseas seem easy. Younes, who grew up in Lebanon and is based in New York City, has clobbered the competition during his 11-year tenure at Julius Baer International. Over the past decade, the fund returned 17% annualized to May 1 -- about twice the average return of all diversified international-stock funds.
Younes, who runs the fund with Richard Pell, thinks big trends first. He looks for businesses that benefit from positive forces in the industries in which they operate and that don't face "headwinds." Younes, 44, wants stocks that he can hold for five to ten years, as well as other medium-term investments that are selling for less than the company's fundamental value.
Younes is keen on Homex Development, Mexico's leading homebuilder. To help alleviate an acute housing shortage, the Mexican government has begun providing subsidized loans to its lower- and middle-class citizens to purchase homes. He thinks the company can generate 15% annual earnings growth over the next five years. The stock sells at 15 times this year's estimated profits (all share prices are to May 15).
Younes also likes Norway's Norsk Hydro. While most major oil companies struggle to boost output, Norsk is ramping up by nearly 10% a year. Moreover, Younes thinks Norsk Hydro has a good shot at partnering with Russian natural-gas giant Gazprom to develop a huge field in the Barents Sea. The stock trades at 13 times the average of analysts' 2006 estimates.
In searching for companies with strong "tailwinds," Younes seeks opportunities in consolidating industries with relatively few players. He sees a lot of potential in cement, in which the ten biggest companies hold 55% of the global market, up from less than 20% in the 1980s. His favorite is France's Lafarge, the worldwide leader.
The liquor industry, ruled by four global companies, is even more concentrated. His pick is Diageo, the British purveyor of such brands as Smirnoff vodka and Johnnie Walker whisky. As people age, they tend to switch to hard liquor, and Younes thinks Diageo could generate double- digit earnings growth the next few years. The stock trades at 17 times estimated earnings for the fiscal year ending in June 2007 and yields 2.5%. --Andrew Tanzer
Focus on a few
When Joel Greenblatt speaks, investors listen. Since founding Gotham Capital in 1985, hedge-fund maestro Greenblatt says he's returned an astonishing 40% a year. He agreed to discuss two of the five stocks in his super-concentrated portfolio with us.
In his recently published The Little Book That Beats the Market (Wiley, $20), Greenblatt describes a "magic formula" for picking stocks. In brief, he seeks companies with high returns on capital and high earnings yields (profits divided by stock price); the formula uncovers high-return businesses with undervalued stocks. Greenblatt, 48, offers a clue about what the formula is uncovering these days: "This is the first time in 25 years that most of the bargains we're finding are in large-cap, quality businesses."