How to Beat the Market in 2010
In a very challenging year for stocks and stock pickers, my list of Top 10 Stocks for 2009 gained 28.5% versus the market’s 23.5% gains. Beat the market by 5 percentage points each year, and you’ll be significantly ahead of the game. Of course, that was then, and this is now.
The good news is, my Top Stock Picks for 2010 are up nearly 5% in a little more than a month of trading, easily beating the near 4% loss of the S&P 500. And there are more profits to be had. According to my analysis, stocks will gain approximately 10% this year. Given the steepness of the yield curve and the emergence of a new business cycle, profit growth is all but guaranteed. The stocks on this year’s list were designed to significantly outperform the market — if the overall market gains 10%, these stocks in the aggregate should double or triple that.
The question now is: How do we beat the market this year?
The answer, put simply, is: By buying stocks that can grow quickly. That is, you want to invest in small cap companies that can substantially increase earnings and trade for a reasonable multiple of price to earnings, i.e., they’re undervalued.
Here are five such stocks.
Top Stock Pick #1
Smith & Wesson (SWHC)
Gun stocks were all the rage in 2009 as we all anticipated a change in power in Washington. With Democrats taking control of both the executive and legislative branches of the government, investors rightly predicted that gun sales would skyrocket, and they were right. Gun makers saw sales and profits grow substantially, and their stock prices went up, too. Smith & Wesson (SWHC) more than tripled in value. Even so, shares remained relatively cheap given the growth potential.
More recently, though, SWHC shares have sold off significantly on concerns over future sales. Even if you assume that sales of guns will decrease from the current pace, SWHC trades for a low valuation. Analysts expect the company to make 37 cents in the current fiscal year ending in April, 2010. At a price of approximately $4 per share, SWHC trades for just 11 times current year earnings. The expectation is for earnings to grow to 44 cents in the following fiscal year. That’s almost 19% earnings growth. So even if sales go down, there’s a big cushion here. More likely, I think Smith & Wesson will meet or exceed these expectations. If so, this stock could double in value in a short period of time.
Top Stock Pick #2
HQ Sustainable Maritime Industries (HQS)
Seafood is a huge part of the food chain, and it provides a vital supply of protein to a growing world, and growing that supply is what HQ Sustainable Maritime Industries (HQS) does. The company is in the business of farming hybrid tilapia and white-legged shrimp that is produced and processed in China and exported to markets including the United States, Canada and Japan. HQS is already profitable and on track to make 74 cents per share in the year ending December 2009. Shares trade for less than 10 times that number. What about growth? Analysts expect HQ to make 92 cents per share next year. My guess is that the company does better than that heady 24% growth in 2010. Historically, owning a stock that trades for a single-digit multiple of earnings and yet posts double-digit earnings growth tends to generate big gains for investors.
Top Stock Pick #3
While upscale restaurants struggle, budget diners flock to lower-cost options. One stock poised to benefit from this trend is Sonic (SONC). The fast food drive-in chain offers busy, cash-strapped consumers an affordable option for dining out. Although shares of Sonic have bounced from the market lows in March, the bounce has not been as strong as with other companies. I view that underperformance as a market oversight and an opportunity for forward-looking investors. For the current fiscal year ending in August, Wall Street predicts a profit of 78 cents per share. In the 2011 fiscal year that number jumps to 92 cents. Investors can buy that expected 20% growth for just 11 times 2011 forward earnings. That’s cheap in my book. More importantly, earnings at the beginning of a new business cycle tend to do better than expected. As such, a value like this becomes even more attractive.
Top Stock Pick #4
China and Brazil may be the sexy trading markets of the moment, but PriceSmart (PSMT), a warehouse retailer that operates in Central America and the Caribbean, has built a nice business operating south of the border. The company is profitable with a strong balance sheet. Economic weakness across the globe fits well with its business plan of selling goods at low prices, and it provides fertile ground for continued growth. Analysts expect a profit of $1.39 in the current fiscal year ending in August. For 2011, earnings are predicted to be $1.73. You can buy that 24% growth for just over 10 times forward earnings.
Top Stock Pick #5
STEC, Inc. (STEC)
STEC, Inc. (STEC) makes the list because its solid state storage product is believed to be the future for storage. STEC drives are more energy efficient, run with less heat and are more reliable than hard drives. No wonder Seagate Technology recently announced its own product in the space. Solid state drives still represent a small fraction of the entire disk drive market, estimated to be some $33 billion in sales. STEC is expected to make $1.61 per share in the current year ending in December. Analysts estimate a profit of $1.90 in 2010. I think that estimate of 18% growth is too conservative. For some amazing reason, shares of STEC trade for just seven times 2009 estimates. As investors grow more comfortable with risk, that multiple is likely to expand, and it could double, or more, if the company beats expectations in 2010.