We may not have a crystal ball to peer into the future, but by using TheStreet.com proprietary statistical models, you are likely to find good ideas to invest in for the next 12 months. Here are examples of seven investments that the models expect to be among the best performers a year from now.
You'll notice that this isn't a list of just seven stocks or seven funds; for this list, I combed every investment vehicle in TheStreet.com Ratings universe to give you the best edge on the year ahead. You won't be able to do that by just sticking with one type of vehicle. In 2008, once again you'll need every type of arrow for your quiver.
This approach worked well last year, but there were some surprises.
The seven-to-own picks for 2007 appreciated an average of 14% vs. 5% for the
benchmark during the year.
PowerShares Aerospace & Defense Portfolio
Vanguard Telecommunications Services
Gamco Global Telecom
Schwab Health Care Focus Fund
Of all the picks, the real home run was the timely call on Caterpillar, which at one point was up over 40% but came down as fears about the U.S. economy and slowing earnings growth at the company cooled investors' enthusiasm on this stock.
Fortunately, all of last year's picks did at least as well as the overall stock market. But the 5%-6% returns for VOX and ADBE were disappointing nonetheless. In the case of VOX, the strong 20% average gains in
Dow Jones Industrial Average
that represent 40% of that fund were not enough to offset declines in
and other smaller communications stocks.
Before proceeding with this year's picks, here's a quick overview of the stock-picking methodology used.
To be considered, the stocks or funds had to carry a buy recommendation in TheStreet.com Ratings screener. For stocks, this computerized set of calculations uses five major factor groups: a) growth b) total return c) efficiency d) volatility and e) solvency to derive the stocks with the best potential for price appreciation. For funds, the Ratings models rely on rolling 12- and 36-month returns adjusted for price volatility. The models utilize drawdown risk, which lowers the rating grade for those investments with the tendency to dramatically move down in price. As a final stock filter, I selected those top-rated stocks with the best performance over the last two years; solid cash flow increases and positive earnings growth prospects. These and other similar strength and expectations factors I discussed in this recent article
Tech Trends to Watch in 2008
So how might you find the top picks for 2008?
1. The world is experiencing significant materials price inflation fueled by continuing strong demand for raw materials from India and China. So the first pick is the American Depositary Receipt (ADR) of the Brazilian company that mines the iron ore,
Companhia Vale do Rio Doce
This global mining and minerals supply gap has not gone completely unnoticed. The price of RIO has been on a steady climb since the fall of 2007. Any pullbacks in RIO's price should be viewed as golden buying opportunities, as was the case in August 2007.
For those interested in a direct play on steel, consider
, a minimill steel producer in North America. GNA shares were up 72% over the last 12 months, and the stock was upgraded to buy by TheStreet.com Ratings in October. Another alternative may be
, which has been undergoing its own restructuring and has the potential to likely be in the news in 2008 as an acquisition candidate.
The theme is clear. Mining and materials stocks are likely to remain hot next year.
2. Because a slowing U.S. economy is forcing investors to focus on real earnings of companies, the next pick is the A-plus-rated ETF
WisdomTree International Communications Sector Fund
. Like other WisdomTree funds, DGG uses a fundamentally weighted portfolio that relies on items such as dividends paid and core earnings to invest. This fund provides a play on the weaker dollar, the continuing market strength in China and the global consolidation of regional and national providers.
How much of a difference might this unique type of a fund make in overall performance?
Last year, DGG appreciated 23% vs. a 5% a gain over last year's telecom pick, Vanguard Telecommunications Services (VOX). It contains winning global telecom stocks such as
, up 38.6%;
. up 44.8%; and
, up 126.1% last year. This may well be a better approach to investing than using the market values of the underlying stocks, as is commonly the standard practice at many other funds.
This also illustrates where an innovative ETF can generate higher return than the average stock fund. But stocks are not the only class considered here, as our next pick indicates.
3. While oil now drifts past the psychological barrier of $100 a barrel, other commodities also have been experiencing price moves, too. The
PowerShares DB Commodity Index Tracking Fund
provides a long-term vehicle to trade a rules-based index based on six liquid futures contracts on light sweet crude oil, heating oil, gold, aluminum, corn and wheat. With a mere 83 basis-point expense ratio, this ETF has been rising at an average rate of 10% during each of the last three months. But watch out for volatility in pricing as the underlying investments are commodities. In other words, don't expect a straight-line price appreciation in this one.
4. Because not everyone is ready to join the brigade of private-equity hedge fund managers shorting subprime mortgages and financials, habitual contrarians may like
ING Janus Contrarian
With a 21% return on a one- and three-year basis, this multicap core equity fund effectively blends together both growth and value opportunities. This is also a global fund, which means that it invests about 53% in the U.S. and the rest in other countries. The largest three U.S. positions in this fund were
, up 163%, ;
, up 33%; and
Coventry Health Care
, up 18%. All posted solid gains last year. Its largest non-U.S. position is
, India's second largest bank. The approach taken by manager by David Decker is a very fundamental value orientation with company visits and bottom-up analysis.
5. Cost-effective performance and exposure to booming Asian emerging markets are the main reasons for the next fund pick. The
Matthews Asia Pacific Fund
focuses on long-term capital appreciation. Japanese stocks represent 41% of the portfolio; China/Hong Kong, with 23%, makes up the next largest country concentration. MPACX'S veteran portfolio manager Taizo Ishida brings over 20 years' experience to this fund and a solid track record. One year performance was 21.8% and three-year return was 19.7%
Unfortunately, MACSX is closed to new investors. But three other Matthews Asian Funds' no-load mutual funds also are rated buy
Matthews Asian Technology
If you are looking for a shorter-term vehicle, consider
Asia Pacific Fund
, an ETF with a more industrial portfolio, with 50% of the portfolio in Hong Kong and Singapore.
Either way, Asia and the emerging markets are clearly on track to deliver high growth.
6. Because some growth stocks just seem to keep going up, and one day we all will own an iPod or iPhone,
is our tech-stock pick of the year.
Betting on Steve Jobs to win is not a controversial call. Three out of every four analysts who follow it have a buy rating on the stock. Earnings estimates for this stock keep being revised upward steadily over the last year. The $6.10 estimate for 2009 represents a 25%-30% compound-growth range over the next 12 to 18 months.
Next week, at MacWorld, some are predicting enhancements to iTunes, iPod and iPhone products that will draw attention to Apple. Expect further upward earnings revisions, too.
7. Finally, no healthy portfolio would be complete without at least one health care stock with noncyclical characteristics. Our last pick is
Merck & Co.
, a global pharmaceutical company. While this $123 billion market value stock was up a roaring 37% last year, it may still have upside potential for the patient total return investor.
Earnings estimates for the stock have been raised 20%-25% over the last year. The stock sells at a very reasonable 15 to 17 times earnings based on earnings estimates of $3.39 for 2008 and $3.81 for 2009.
So there you have it. Seven to own for 2008. No matter what you see in the future for the year, hopefully these alternatives will provide some ideas that can help you reposition your portfolio and create wealth.
Rudy Martin is the former director of research for TheStreet.com Ratings. Earlier he worked 25 years in investment research and management positions with Fidelity Investments, Lincoln National, Dean Witter Reynolds and Transamerica Investments. He began his career as a securities investment analyst at Duff and Phelps where he published equity and fixed income securities investment recommendations. Martin holds a master's degree in finance from Kellogg Northwestern University and is also a Chartered Life Underwriter.