An Update on Barron's 10 Stocks for 2012, Part I
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As 2011 wound down, Barron’s put out its usual list of 10 stocks to buy in 2012. I broke down the recommendations into two parts and offered a critique to help investors achieve better returns. The first quarter is nearing an end and it has been a wonderful start for equity markets thus far. Let’s see how the picks have fared and if there is anything that we should change. As with the initial write-ups, I will do this in two parts over the coming days.
While we are still in the early innings of the year, my initial recommendations for Part I have provided investors better returns than the picks offered by Barron’s. As of this writing, the S&P 500 has produced a total return of 11.95% year-to-date. Four of Barron’s five picks have underperformed and two actually have a negative total return on the year. That is not exactly a great start, but there is still plenty of time left in the year. With correlations dropping in recent months, stock pickers may start to come under more scrutiny. A popular publication like Barron’s isn’t immune from this and should be held accountable. So let’s dive in and see the results.
Financials have been the hottest sector this year with the S&P 500 Financials having produced a year-to-date total return of 22%. Barron’s pick was Metlife (NYSE: MET) and the stock has produced a total return of 20% for the year. Not bad, but it more or less just matches the sector average. You would expect that from a well-run, conservative industry leader in the insurance industry. I have highlighted Hartford Financial Services (NYSE: HIG) a couple times this year along with my most recent post. Hartford Financial Services is a leading provider of life, retirement products, and property/casualty insurance to individual and institutional customers. They are very sensitive to the equity markets due to their large exposure to variable annuities. I felt that Hartford was a leveraged play on a rising equity market and that investors should be taking additional risk given the attractive valuation in the market. This thesis has panned out thus far with the stock up 31% YTD.
What has been the most talked about investment concept this year? It goes hand in hand with the most talked about stock, Apple (NASDAQ: AAPL). That’s right, dividends! Apple, the largest company by market capitalization in the S&P 500, announced the initiation of a dividend a little over a week ago. The company set a quarterly payout of $2.65 and the stock has an indicated yield of 1.7%. We will get to the technology pick in Part II, but unfortunately we both missed the boat on Apple. Barron’s opted to go to the slow growth telecom industry for their dividend choice. They took Vodafone Group Plc ADR (NASDAQ: VOD), one of the largest telecommunication companies in the world. Vodafone serves more than 300 million customers and has a 45% ownership stake in Verizon Wireless. The stock has produced a total return of -1.6% YTD. My recommendation was Apollo Investment Corp. (NASDAQ: AINV). In what has been a tumultuous quarter for the company, the stock has still performed pretty well with a total return of 9.5%. I would recommend investors continue to steer clear of the telecommunication space for all of 2012. I think Apollo Investment Corp is still poised to be a winner over the next 18 months, but fear that it could underperform during a market correction.
Barron’s again fell for the high-yield trap with their recommendation of Royal Dutch Shell Plc ADR (NYSE: RDS-A). Royal Dutch Shell is a major integrated oil company with annual revenues approaching $500 billion. They had the highest yield among peers at 4.7% when Barron’s picked them. Since then, the stock has produced a total return of -4.8%. The company’s heavy reliance on refining operations has weighed on shares. I opted for a company on the E&P side of the equation, Apache (NYSE: APA). This stock has returned 9.1% YTD, and while it has underperformed the S&P 500, it has beaten the S&P 500 Energy sector’s total return of 3%. I would continue to recommend investors stay away from large integrated oil companies with heavy refining operations despite their above average dividend yields. Apache remains my favorite large cap energy stock.
There were two stocks in the first part where I actually agreed with Barron’s, Berkshire Hathaway (NYSE: BRK-A) and Sanofi SA ADR (NYSE: SNY). Both are up, but have not kept pace with total returns of 6% and 5.6%, respectively. Berkshire remains a great buy in my opinion with the price-to-book at just 1.2x, little changed on the year. The P/B for Berkshire Hathaway is seldom this low and since 1987 has averaged 1.7x. This stock just makes sense and offers a boring, but attractive risk/reward profile. Sanofi has thus far bested nearly all their large cap peers: Pfizer, Johnson & Johnson, Merck, GlaxosmithKline Plc, Eli Lilly, Novartis, and Bristol-Myers Squibb. The stock still looks attractively valued and should continue to plod along, but will likely not keep pace during sharp run-ups like we have witnessed this year.
The first five recommendations from Barron’s have proven sub-par to this point. We will review the other picks in the next post and see if they fared any better. Hopefully they did. Investors need to hold popular publications accountable and should be cautious taking advice from consistent underperformers. I don’t know Barron’s full track record, so I can’t pass too much judgment. My recommendation is that investors should continue to stay the course, but be prepared for potential turbulence in the markets during the second quarter. More nimble investors may want to wait on names like Apollo Investment Corp or even Hartford Financial Services. Despite this, the U.S. market valuation is overly compelling and investors shouldn’t get too cute with timing the 5% corrections, but should instead focus on key cyclical turning points. This year will likely see the continuation of the current bull market and I would expect stock prices to be near their highs as the year concludes.
Motley Fool newsletter services recommend Apple, Apollo Investment, Berkshire Hathaway and Vodafone Group Plc (ADR). The Motley Fool owns shares of Apple and Berkshire Hathaway. market8 has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.