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If you have 10 bucks, a brokerage account, a little imagination and a lot of patience, you can beat the market next year. In fact, you could probably do it every year -- and maybe one day,
will be calling you the next Warren Buffett.
The benchmark for great investors is 20% per year. You see that figure on display whenever a business publication gets excited about the investment returns of Buffett or someone like him. It's roughly the compounded annual return of his holding company,
, since the late 1950s. That's more than double the return of the
in that span, including dividends.
When hedge fund guys chat about great returns over a long period, they talk about 25% to 30% annualized. And all of them recognize that it's the toughest benchmark in the profession.
A $10 Stock That Grows to $12
But if you think about it, there is a relatively easy way to get a 20% return year after year. It's not extremely easy, of course, but it is easier than you might think. Just find one $10 stock that will become a $12 stock in a year -- a little more than $12 if you plan to sell it after 12 months and need to pay taxes on the gain.
It would be a big risk to bet all of your money on a $10 stock. But what if you buy a small basket of $10 stocks and hold them for a year? Focus only on those with high
MSN Money StockScouter scores, mix them up by sector, include some growth and some value and take at least one rich-yielding real estate investment trust. It shouldn't be impossible to find a few that would go to $14 or $16, a couple that would go to $12 or $13 and several that would end up flat or fall far enough to trip a 10% stop-loss order. Add them up, average them out and
: You have a 20% return.
Yes, a $10 Stock Can Be Risky
Of course, $10 stocks are often small-caps on their way up or mid-caps on their way down, so they're pretty risky. You could move this exercise up a notch and find 10 $20 stocks that will rise, on average, to $24 instead. Let's try both now to see if we can earn 20% over the next year with a concept as simple as this.
For my list of stocks trading near $10, I queried the MSN database for stocks priced between $9.50 and $10.50 at the close on Nov. 26, market capitalizations greater than $50 million and average daily volume greater than 25,000 shares a day -- plus MSN StockScouter scores of 8 or greater.
Twenty stocks met those criteria, so next I sorted them by StockScouter factor scores, aiming to take the ones with the most As and Bs and the fewest Cs, Ds and Fs. My "$10 to $12 portfolio" is listed below.
This is a pretty diverse list that appears to minimize risk. It tends toward small-caps, but there are a few mid-caps and large-caps as well. And the sectors are all over the map, ranging from high-yielding real estate investment trusts to cable TV to banks, software, a utility and an oil driller. Most have the wind at their backs, although a couple are coming off one-year lows.
Here are the ones that appear the most interesting:
- Cornerstone Realty Income Trust( TCR), which pays an 8% dividend, owns and manages high-end and mid-range apartment complexes in Virginia, the Carolinas, Georgia and Texas. Returns have been solid, if unspectacular. Financial results were only fair in the last quarter, but the company says leasing momentum has strengthened. Considering the yield, though, this $10 stock only needs to advance $1.20 in the next year to provide a 20% return. It traded in the mid- to high-$11 range in most of 2001 and 2002 and appears headed back to that area.
- Siebel Systems( SEBL), which sells software that helps large companies manage their marketing teams, only needs to get to $12.06 -- a level it held as recently as April. Revenue has steadily declined in recent quarters, making the stock as cheap as it has been in years -- though it's still not inexpensive. To envision $12, investors would need to be optimistic about economic growth and corporate IT spending over the next 12 months. That makes Siebel something of a long shot.
- PolyOne (POL) - Get Report, which makes plastics and resins, needs to get to $11.25, which seems doable even though it hasn't seen that level since 2002. Sales and earnings trends have been passable, the valuation is constructive and buyers have been coming into all plastics and chemical companies in recent months.
A More Dynamic List
The highly rated stocks that have the potential to advance 20% by moving from around $20 to around $24 are a little more compelling in some ways. As you can see below, you have your choice of a Taiwanese wireless giant, a major U.S. oil-and-gas exploration company, a major maker of painkillers, a major oil shipper and a Dallas-based commercial bank.
The most interesting name in this group is
Chung Hwa Telecom
, one of the largest telecommunications companies in Taiwan. It has a legacy fixed-line business, but it is increasingly focusing its attention on wireless customers. The government of Taiwan owns most of Chung Hwa and would like to spin out more to the public, although it has encountered resistance from union members. With a 6.5% dividend yield, it only needs to get to around $22.80 over the next 12 months to dial in a 20% return.
Among the rest,
looks a bit overextended at the moment. It may backtrack before heading toward the 20% goal. Among the smaller names,
( ECLP), which sells administrative and financial software to hospitals, looks like it could find favor as it is breaking out on good volume amid signs that it could finally turn profitable next year after several years of losses.
I'll check in with these stocks in six months to see how far they've gotten. If you have any other $10 or $20 stocks -- and not ones priced at $12 or $8 or $17 or $23 -- that you think could gain 20% next year,
email me and let me know why.
Thanksgiving column yielded a feast of responses to my request for opinions on which beaten-down "M" stock would do best next year. These M stocks, you may recall, were chipmaker
Maxim Integrated Products
and insurance broker
Marsh & McLennan
Mail was incredibly detailed and imaginative, and thank you for all of it. Several readers chided chipmaker Maxim as a lousy choice because its management refuses to expense options. Many said Marsh & McLennan would not have a future because it lost the one asset that a broker has: trust. And several said they thought Merck would be tied up in lawsuits forever, making that a poor choice.
But value stocks always have a lot of hair on them. That's why their prices are so depressed. So many readers came up with reasons to buy each. Maxim was deemed the best choice because its diversified range of products for the digital and analog world made it an ideal company to own in a modestly expanding economy that relies on semiconductors.
Many readers said they liked Merck because they believed its phalanx of lawyers would help it avoid serious prosecution. Plus, they said, the legal claims aren't as severe as they appear on the surface.
Finally, a chorus of readers said the woes at Marsh were a big to-do about nothing. Ultimately, they said, its retroactively criminalized commission system would reappear in a more legal fashion down the road after the company's liability insurers paid a fine to settle with New York Attorney General Eliot Spitzer.
I see merit in all three of these stocks, but I would put money on Maxim and Merck and treat Marsh with more skepticism. Maxim's options expensing is a nefarious -- but not illegal -- practice that investors have willfully ignored. The stock is expensive but will find favor with investors again -- if not in 2005, then in 2006 or 2007.
Merck will probably escape the worst-case scenario and has a shot at coming back strong over the next few years. As far as Marsh goes, it is still hard to understand how the company can win back its customers' confidence and replace its lost earnings. It has no hard assets and no economic moat to prevent customers from moseying over to rivals. But new management might sweet-talk its way back into companies' good graces, which will make Marsh by far the most fascinating company to watch over the next year.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Alliance Imaging, Pioneer Drilling, Interwoven, Government Properties Trust, Cardinal Financial and Hornbeck Offshore Services to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
Jon D. Markman is publisher of
StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. At the time of publication, Markman was long Chung Hwa Telecom and OMI. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at
firstname.lastname@example.org; please write COMMENT in the subject line.