Before 2014 comes to a close, take a moment to meet some Rodney Dangerfields of the stock market — because it might boost your returns in 2015. You won't see these stock newsletter writers ranting on your favorite TV show. But they merit your attention more than the talking heads. That's because a select few of them have managed to produce market-beating returns over the long run.
Take George Putnam, who pens the Turnaround Letter, for example. Since March 2000, he's posted 13 percent annualized gains, compared to 3.8 percent for the Wilshire 5000 Total Market Index (with dividends), according to Hulbert Financial Digest, which tracks the returns of many investment newsletter writers.
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Or how about John Buckingham of the Prudent Speculator? His tally: 11.2 percent annualized returns over the same time.
We canvassed some of the most successful newsletters for their market outlook and favored stocks. You can get a glimpse of their best picks below, but first, a few disclaimers. All of these newsletter gurus are seasoned pros, so they always suggest a well diversified portfolio — across many names and most sectors — to reduce risk. It's only with a little arm twisting that I can get them to share just two favorite stock picks. So bear in mind that these picks are meant to be part of a balanced portfolio, not a replacement for it.
Second, these market mavens all happen to be value investors, who closely examine companies to gain an edge, eschewing the potential folly of overall market forecasting. They only give up market forecasts grudgingly, if at all. Pay more attention to the stocks than their big-picture predictions.
Related: How Warren Buffett Beat the Market Again in 2014
Damaged Goods
As the name suggests, George Putnam's Turnaround Letter favors beaten-down value plays with decent prospects and enough financial strength to survive, and thus turn around. So just about any name he suggests is probably going to look ugly in some way.
Take the first stock he shared with me, for example: BP (NYSE:BP). "Everything that can go wrong, has gone wrong over the past few years," says Putnam. You no doubt recall the Gulf of Mexico Macondo oil spill disaster in 2010. Unresolved legal claims may still cost tens of billions of dollars. BP also has exposure to Russia's woes, since it has a big stake in Rosneft (ROSN.ME), a Russian energy company. Now the price of its main product, oil, has plummeted.
But BP has a strong balance sheet, solid cash flow, high quality energy assets and a deep bench of exploration and production talent. "They will begin to see some things go right next year," says Putnam. "It looks cheap here." BP trades below book value. He also likes the hefty 6.4 percent dividend yield.
Next, Putnam likes Accuride (NYSE:ACW) a microcap company with a valuation just over $200 million that makes wheels, brake drums and transmission housings, among other things, used in commercial trucks. The company has had some quality issues in manufacturing, which Putnam says it seems to have resolved, and sales growth for commercial vehicles recently slowed. Both have weighed on the stock, says Putnam. But lower fuel costs may stimulate trucking, so one way or another Accuride should benefit. "Either trucks will fall apart or truck owners will be making more money and replace them, and that will flow through to Accuride," he says.
As for Putnam's market outlook, he expects deeper volatility in 2015 because stocks have done so well for so long. "That can't continue forever,” he says. “I would be cautious." But he expects the economy to remain strong, so he is not projecting deep and lasting pullbacks.
Hated Sectors? We Love 'Em
Energy and commodities, including gold, are out of favor now. So naturally those are two areas where contrarians are busy hunting for bargains, and John Buckingham, editor of the Prudent Speculator, is no exception. Buckingham's forte is out-of-favor names with strong cash positions and healthy cash flow, manageable debt levels and catalysts on the horizon that could propel the share price higher. Picking the right ones has helped the Prudent Speculator post 11.2 percent annualized gains since March 2000, according to Hulbert, and it earns the letter perennial placement among Hulbert's top seven for 20-year returns.
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A current Buckingham favorite is Yamana Gold (NYSE:AUY), a low-cost gold producer. Its stock is down about 50 percent this year, while the price of gold is basically flat. "So you have an overreaction, in my mind," says Buckingham. "They are not a high-cost producer. They are not going out of business." He notes Yamana is still cash-flow positive, and it still pays a dividend, for a 1.4 percent yield. The worry, of course, is that gold will fall further. But so far that has not played out, and if gold just holds these levels "the stock will rebound significantly," predicts Buckingham. It will do even better if gold rebounds.
Next, Buckingham likes Fluor (NYSE:FLR), an engineering and construction company whose stock has been hit so hard because of energy sector exposure that it now trades near the low end of its historical valuation range. Fluor builds refineries, pipelines and other energy infrastructure. But Buckingham thinks fears about energy companies cutting back projects are overblown. "They won't be canceling projects that have been many years in the making," he predicts. Besides, Fluor has a lot of business outside of energy. It builds power plants and infrastructure for industry, for example. "Profits are still going to be healthy," says Buckingham. He expects Fluor to continue to return cash to shareholders via buybacks and dividends (shares carry a 1.4 percent yield).
As for the market, Buckingham expects 10 percent to 12 percent gains in 2015, based in part on improving corporate profit margin growth, ongoing economic strength and the historical pattern of good returns in the third year of the presidential election cycle.
The Protective Moat
Analysts at Morningstar have a fetish for protective moats around companies. This means companies that have some form of sustainable competitive advantage — like inherently lower costs, or costs involved in switching that serve to keep customers loyal. Morningstar is also a value shop. Both traits have served the Morningstar StockInvestor letter well. It makes Hulbert's top seven letters with the best five-year returns — 17.3 percent annualized, for this one.
Matthew Coffina, Morningstar StockInvestor editor, recently suggested Magellan Midstream (NYSE:MMP), an energy pipeline company. He thinks Magellan won't be hurt too badly by the plunge in oil, since the prices it can charge are regulated and it pipes mostly refined oil products. "It could even benefit because people drive more and use more gasoline, which increases volumes on their system," says Coffina. As for oil, a lot of the revenue from its crude oil transport is guaranteed in long-term contracts. Magellan pays a 4 percent yield.
Coffina also likes Google (NASDAQ:GOOGL), under pressure because of three worries that he thinks are overblown.
First, investors are concerned that Facebook (NASDAQ:FB) is gaining share in digital advertising, and that Apple (NASDAQ:AAPL) may remove Google as the default search engine in iPhone's Safari software. But digital advertising growth is so robust, neither of these threats matter as much as investors think, says Coffina.
Next, investors are worried about contracting profit margins because of investments in projects outside of search, like electric cars or balloon-delivered Internet. "But this is under Google's control," says Coffina. "Either they pay off as investments, or they scale them back and margins come back that way."
Related: Google Aiming to Go Straight into Car with Next Android
Third, investors are worried about anti-trust crusades against Google in Europe. This one's tougher to predict, but it will take many years to play out, and Coffina believes it may not ultimately have a big impact on Google's business.
If you consider any of these names, please remember that value investors typically invest for the long term, and you should too. Sure, these stocks could do well in the short-term, but a time horizon of at least a year, and preferably more, is the minimum. If you want hot trades, check in with the talking heads on TV.
Michael Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program. At the time of publication, Brush had no positions in any stocks mentioned here. He has in previous years recommended Accuride and Google to subscribers of his newsletter, Brush Up on Stocks.
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