The Best Stocks to Own (Hint: They Are Not the Most Widely Held)

EARNINGS GROWTH TRANSLATES INTO STOCK PRICE APPRECIATION!

Once those earnings begin to significantly slow down, the growth investor should move on and leave the stock to the value investors. Sadly, a large or mega-cap stock that is now growing at a single-digit annual pace next enters into a new realm, that of a widely held stock.

That is not to say that one cannot make money in a widely held stock, especially if you can buy them when they are severely beaten up, but I prefer to shop in other aisles of the stock market. I prefer to own stocks that possess both performance and value.

If we buy stocks just because of performance and ignore value, we are momentum investors. I think that we found out a lot about the importance of valuation back in the Nasdaq crash of 2000-2002. We also learned that same lesson again in recent years in the housing market. Value is very important.

I have found however, that many so-called grossly undervalued stocks are nothing more than value traps. What is wrong with combining the best of performance investing, but also paying attention to value? Let me cite Polaris Industries (PII) as an example:

I wrote about this rugged American-made stock back in early December of last year. The stock was trading at $59.80. The article had very few page views, I was after all not writing about Cisco. The stock closed at $80.00 on Friday, but it still exhibits the best of worlds, performance plus value.

You can easily see how the 1, 3, 5, and 10 year performance has clobbered the S&P 500. You can also see that despite the recent big advance in share price the stock still has a favorable PEG ratio of 1.05. Also, when I extrapolate out current earnings at the growth rate estimate of the analysts, and apply a reasonable multiple, I still see significant upside potential in the stock over the next five years.

It is your choice, you can fill your portfolio with names that are familiar and widely-held, or you can dig a little bit underneath the surface and find stocks that are still in the prime of their lives. Sit back and take a big gulp of fresh air, because in future articles I am going to do my best to point you in the right direction of the BEST STOCKS NOW!

Disclosure: At the time of publication, Gunderson was long DLTR, AZO, TNH, ROST, MNST, TSCO and PII.

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