Our best and worst stock picks of the year
With the market rocking this fall, many of our recommendations have paid off handsomely.
(Fortune Magazine) -- As you may have noticed from the regular shouts of "New record high!" coming out of Wall Street, it's been a pretty exciting year for stock market investors. Overcoming all kinds of political and economic worries, from the war in Iraq to the housing bust, the Dow closed above 12,000 on Oct. 19.
The benchmark index continues to hit new peaks; through Nov. 15, it had delivered a total return of 14.3% for the year. The S&P remains about 8% below its all-time high but has returned 11.9% since the beginning of the year. Even the long-suffering Nasdaq has returned 10.8%, although it remains far below its record level of 5,049, reached on March 10, 2000.
While 2006 still has a few weeks to run, we wanted to check up on the calls we made this year. We're delighted to report that there were more winners than losers. So here's a look at some of the trends we examined, and the best and worst calls of the bunch. (The returns are figured from the prices cited in the stories that discussed the picks.)
The broadband-powered tech revival helped boost one of our biggest winners of the year, Akamai (AKAM), up 55% since we recommended it in "The Boom Is Back" (May 1). The company's EdgePlatform facilitates faster content delivery, so we can watch all those videos on YouTube without crashing our systems.
Several other stocks mentioned in that story also excelled, including Cisco (CSCO), up 27% thanks to strong demand for its routers and switching systems that connect computer networks. Leading cable company Comcast (CMCSA), up 45%, and media giant News Corp. (NWS), up 23%, were also big winners.
But that story produced two losers as well: Navteq (NVT), down 37%, and Yahoo (YHOO), off 12%. Navteq makes the software behind Google Maps and gets three-quarters of its revenues from companies that manufacture GPS devices for automobiles. It lowered its guidance for the rest of the year, citing what it called unfavorable car sales trends. Yahoo's reasonable price/earnings ratio led us to suggest that the stock was the right way for value-minded investors to play the online advertising boom. But Yahoo remains a distant second to Google in market share for search ads.
Speaking of Google (GOOG), in May we recommended staying away from the volatile shares, which were just over $400 at the time. As of mid-November the stock was tantalizingly close to $500, nearly a 20% pop. On the other hand, the shares did dip as low as $332 before rising, and we still think they are too risky for most investors.
With big drugmakers struggling, we looked at nimbler small companies in "Pharma? Think Small" (March 20). Cephalon (CEPH), which makes a narcolepsy drug, is nearly flat. CollaGenex Pharmaceuticals (CGPI), which focuses on skin treatments, is up 11%. But we got a big payoff from Kos Pharmaceuticals (KOSP), which we recommended at $47. The stock was down for much of the year, but in November, Abbott Labs offered to buy the company for $3.7 billion, sending shares up to $76.
Early in the year, with the price of oil at around $65 a barrel and rising, we asked, "Wanna Make a Bet on Biofuels?" (Feb. 6). The price of crude peaked this summer and has been sliding since then, but our biofuel choices are holding up. The one pure play in our story was Pacific Ethanol (PEIX), which has soared 91%. We also saw big opportunities for agricultural processer Archer Daniels Midland (ADM), which is up 27%. Smaller agricultural commodity and food company Bunge (BG) and genetically-modified-seed supplier Monsanto (MON) each gained 11%.
In the May 29 issue we wrote that the banks offer an appealing combination of earnings power, reasonable valuations, and generous dividend yields. Bank of America (BAC) led the way with a 12% advance. J.P. Morgan Chase (JPM) notched a 9% gain, followed by Wells Fargo (WFC), up 6%, and Citigroup (C), up 4%. While Wachovia (WB) is flat, it has a 4.1% dividend yield to sweeten the return.
Most recently we identified "Five Stocks Poised for a Rebound" (Oct. 16). While the shares of these companies were hurting, we said that the fundamental businesses were healthy, and that positive projected sales growth and low valuations made them bargains for patient investors. Although all five stocks are doing well, we meant them to be long-term holdings, and it's far too soon to judge them--except for one. Reader's Digest (RDA), $13 when we picked it, is trading near $17, thanks to a $2.4 billion buyout deal led by private-equity giant Ripplewood Holdings. Private equity has been increasingly active in the media business, and the proliferation of these buyouts has dominated headlines (and enriched investors who owned the takeover targets) all year. Private equity promises to be a big force in 2007 as well.