With January upon us, it is time to think of what to do this year in terms of investments. Any one who has read my columns knows I don't try to prognosticate. The human species seems lacking in its ability to predict, and I claim no special powers. I do not know what the market will do in 2012, nor do I believe that anyone else does, either. When you read about what others say the economy will do, how the unemployment rate will move during the coming year, how the presidential election will affect the market, etc., you should take it all with the proverbial grain of salt.
Yet, I do believe that certain trends can be predicted over the long term -- namely, that those who have a proven track record of success can outperform others in their fields in the future. That is why I use the investments strategies of successful gurus to choose stocks. People such as Warren Buffett, David Dreman, Peter Lynch and James P. O'Shaughnessy, among others, have proven, over time, their ability to pick stocks, and I see no reason to think that their investing prowess will end anytime soon.
This brings me to two investment approaches you could use for the coming year, one of which I will discuss now and the other in my next column: Either focus on the strategies that produced strong returns in 2011 in the belief the market will largely continue this year as it did last year, or focus on 2011's poor performers, in the belief the economic winds will change and the strategies that struggled in 2011 will become winners in 2012.
Value strategies were dogs last year, while growth did better and momentum did best. Often, what outperforms one year under performs the next, but not always. If you think the market will perform in 2012 much like it did in 2011, make these three strategies the foundation for this year's investing: a momentum strategy I created from the writings of a momentum guru, as well strategies I based on how O'Shaughnessy and Buffett invest.
In 2011, these were the top three performers in my portfolio of strategies. While the S&P 500 was flat last year, the momentum strategy shot up 20.9%, the O'Shaughnessy strategy rose 13.3% and the Buffett strategy produced a 10.2% gain. Last year, few investors enjoyed double-digit gains, but here are three guru strategies that produced such results.
This is a technical strategy that looks for stocks with momentum behind them. One way the strategy judges this is by requiring the current stock price to be within 15% of its 52-week high. This is strategy does not look for beaten-down names that might be a bargain. The belief here is that if you want to own quality stocks, you have to pay for them; if you buy on the cheap, you end up with cheap stuff.
One stock that gets high grades from this strategy is Lululemon Athletica (LULU), a specialty retailer that sells yoga-inspired athletic apparel primarily for women. Founded and based in Vancouver, B.C., the company owns and operates more than 140 stores. Lululemon's stock price is currently within about 7% of its 52-week high. Other factors in its favor include its earnings per share (EPS), which have increased in each of the past five years, a relative strength rating that has been increasing over the past four months (this is a measure of how well the stock has performed vs. the other stocks in the market during the past year), zero debt and a return on equity of 39.0%.
Buffalo Wild Wings (BWLD), a casual dining restaurant chain, is also on the good side of the momentum strategy. Its current stock price is within 4% of its 52-week high. In addition, its EPS has increased in each of the last five years, its relative strength is 94, its industry has 23 other companies with relative strength ratings of 80 or above and debt is minimal.
Retail giant Wal-Mart (WMT) is a favorite of the O'Shaughnessy strategy. In its favor is a huge market cap ($202 billion), EPS that have increased in each of the past five years, a low price-to-sales ratio (0.46) and a solid relative strength of 76.
Sally Beauty Holdings (SBH) is a retailer of beauty supplies through its Sally Beauty Supply and Beauty Systems Group chains of stores, which in total have over 4,000 locations in 10 countries. Sally looks beautiful to the O'Shaughnessy method because of its market cap ($3.8 billion), EPS which have increased in each of the past five years, a very acceptable price-to-sales ratio of 1.16 and a sterling relative strength rating of 94.
Ecolab (ECL) is the global leader in the cleaning and sanitation industry. Its products are used by the hospitality, food-service and health-care industries (among others) to wash dishes, do laundry and the like. The Buffett strategy likes this company because it of its size, EPS that have increased in nine of the past 10 years, its reasonable amount of debt, a solid return on equity of 21.1% (when averaged over the past 10 years) and an expected annual rate of return to investors over the next 10 years of 13.1%.
The Coca-Cola Company (KO), one of the greatest brand names in the world, is a long-time Buffett favorite. The Buffett strategy is sweet on Coca-Cola because it dominates the beverage sector, its earnings consistently increase, its debt is moderate, return on equity has averaged 30.8% and investors can expect to realize a 12.7% annualized compounded return on their investment over the next 10 years.
Now is the time to practice your New Year's resolution of getting your investment house in order. These three strategies did very well in 2011, and are solid long-term performers. Their picks are a good place to start when rebalancing your portfolio for the coming year if you think 2012 will largely be like 2011. If you do not, my next column will provide recommendations from strategies that tanked in 2011.