Stock picker simulator gives pros a run for the money
Some of the top investing gurus in the U.S. had a good time of it in Canada last year if you ignore one resounding mistake.
Their top six Canadian picks gained an average 16.4 per cent, which is pretty much what the S&P/TSX composite index made over the same period. But the total return would have been just under 30 per cent if it weren't for the disastrous choice of printing company Quebecor World, which lost virtually half its value.
The experts, including the likes of Warren Buffett, Peter Lynch and James O'Shaughnessy, didn't actually choose the stocks themselves. Rather, the website Validea.com made the picks using a screening process that seeks to emulate their investing styles.
Validea is a pay website that offers guru stock picks to its subscribers. The site is always looking for new clients, which explains why its vice-president, Justin Carbonneau, contacted this column a year ago to present some Canadian stock names. A year later, Mr. Carbonneau was back with the one-year returns and a new bunch of Canadian stocks that rate highly with Validea's cast of 10 virtual gurus.
First, let's review the results of the past year. The six guru picks were PetroKazakhstan, which was up 72.8 per cent before being delisted as a result of a takeover by China National Petroleum Corp.; Manulife Financial, up 23.4 per cent; Bank of Nova Scotia, up 27.2 per cent; TransCanada Corp., up 6 per cent; Imperial Oil, up 17.8 per cent and Quebecor World (sigh), down 48.9 per cent. In fairness to Validea, Quebecor World was the only one of the six stocks that didn't get a top A rating for wide appeal with all the gurus.
Validea identified these stocks by screening Canadian companies with listings on the New York Stock Exchange, Nasdaq and the American Stock Exchange. Interestingly, Validea's own tally of its Canadian stock picks is much more favourable because it reflects the strength of the loonie against U.S. currency. For example, Validea found that PetroKaz was up 84.9 per cent in U.S.-dollar terms.
This year's crop of five A-grade guru picks were similarly culled from the 212 Canadian companies listed on U.S. exchanges. They are the following:
EnCana Corp. (ECA-TSX). Validea has found that the largest energy company by far in the S&P/TSX index would score very well with a couple of the gurus -- John Neff, a very successful mutual fund manager who seeks stocks with a low price-to-earnings ratio (EnCana's PE is 8.2) and a consistent record of profit growth, and Peter Lynch, the onetime star manager of Fidelity's Magellan Fund and author of One Up on Wall Street.
Intertape Polymer Group (ITP-TSX). This plastics packaging company is an interesting choice because of the 63-per-cent decline in its share price over the past five years. Intertape would be the biggest hit with Joseph Piotroski, who has developed a strategy of finding stocks that are unfairly trading at a discount to their book value, which is the cash value of a business after all debt is repaid.
Petro-Canada (PCA-TSX). The third of three oil and gas stocks on this list, Petro-Canada has underperformed the S&P/TSX capped energy index over the past one-, three- and five-year periods. The stock would find the most favour with James O'Shaughnessy, who wrote What Works on Wall Street and is a money manager who includes a few Royal Bank of Canada funds as his clients, and Mr. Lynch.
Pengrowth Energy Trust (PGF.B-TSX). This oil and gas trust is large enough to have been included in the S&P/TSX capped energy index, and at its current price offers a yield of 12.3 per cent that would augment any share price gains (or mitigate any losses). Pengrowth would seem to have struck a chord with many of the gurus, most notably Mr. Neff, the low PE specialist.
SunOpta Inc. (SOY-TSX). The most "off-the-radar" choice of the five listed here is a company with interests in the processing and packaging of organic and natural foods and recycling industrial materials. The guru who would seem to like it best is Mr. O'Shaughnessy.
Validea uncovered another dozen or so stocks with a B guru grade, including TransCanada Corp. and Scotiabank, both of which were on the A list last year. Other B grades go to Biovail Corp., Sun Life Financial and Telus Corp.
Validea's website shows the guru whose picks would have generated the best returns since mid-2003 is Martin Zweig, a well-known money manager who takes a conservative approach while focusing on companies with strong growth in areas such as quarterly profits. In Validea's estimation, Mr. Zweig would like EnCana and Pengrowth best out of the five top guru stocks.
We'll keep an eye on these stocks, as well as the ones from 2005, in the months ahead. Based on last year's results, the gurus apparently know a little something about stock picking.
