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[Enterprising Investor]

Barron’s Stock Picks Are Beating the Market in 2015 (7/11/15)

Our 73 bullish stock picks rose an average of 3.7% in the first half of 2015, compared with a 1.1% decline for the S&P 500.

By Avi Salzman

Strategists predicted at the start of 2015 that it would be the year of the stockpicker, as rising interest rates would cause weaker stocks to wither. It’s leaning in that direction, though not by much. Through the first six months of the year, just 51% of active managers beat their benchmarks, little better than a coin flip, according to JPMorgan Chase. But that’s more impressive than the 31% who outperformed them a year ago.

At Barron’s, our stock-picking performance has improved considerably from a disappointing showing in 2014.

Barron’s picks from 2015 far outpaced the market in the first six months of the year, buoyed by bullish stories on a hospital chain, an oil refiner, and an aluminum-recycling company. Shares of the 73 companies highlighted in positive articles rose an average of 3.7% from the Friday before publication through June 30, against a 0.3% drop in the value of the benchmarks we judge them against and a 1.1% dip in the Standard & Poor’s 500 index. Add dividends, and the shares of Barron’s picks returned 4.1% against a 0.2% rise for the benchmarks.

Our bearish calls also proved prescient, with stocks featured in skeptical Barron’s stories falling 6.9%, against a 0.5% drop for their benchmarks.

Our longer-term performance was less successful. Barron’s 145 bullish picks from 2014 trailed their benchmark indexes through June 30, rising 3.4%, versus a 7.7% gain for the benchmarks. Our energy picks were particularly weak. Making matters worse, our bearish picks were up more than the benchmarks.

We gauge the success of our stock picks in the magazine every six months. The picks are also tracked at Barrons.com, so readers can check in on our performance whenever they want. See the list of our bullish and bearish selections for the first six months of this year.

We regularly publish follow-ups to our stories. Anytime we advise investors to cash in gains, or stem losses by selling, we lock in the profit or loss on the score card.

Barron’s tracks stocks against various benchmarks—the S&P 500 for large-cap and foreign shares, the S&P MidCap 400 for midsize issues, and the Russell 2000 for small-caps. Stories that mention more than two stocks aren’t included in the score card.

Our top-performing picks included several companies whose basic performance was sound, but whose stocks had suffered because investors feared that some larger factor—fluctuations in the oil market or an adverse decision by the Supreme Court—might derail the company’s success.

At other times, special situations presented themselves, from tax breaks to spinoffs that provided special benefits to investors.

Our most successful pick was Real Industry (ticker: RELY), a small-cap aluminum recycler that rose 48% from our May 11 story to the end of June. The Street cheered the company’s first-quarter earnings, and an analyst initiated coverage with a Buy rating, helping boost the shares. Real Industry has accumulated considerable net operating losses that offer tax benefits, which should amplify profits in the years ahead.

OIL REFINER and transporter Phillips 66 (PSX) has risen 32% since our January story appeared, as refining and marketing results outpaced Street expectations. The spread also widened between Brent and West Texas Intermediate crude, giving U.S. refiners like Phillips an advantage in the global marketplace. In a follow-up story in May, we reported that some predict that the stock could rise to $120-$150 from a recent $80 as the company expands its chemical and midstream businesses.

Hospital chain HCA Holdings (HCA) has risen 30% since our February story ran, aided by the Supreme Court’s favorable Obamacare ruling and impressive first-quarter earnings, up 70%, year-over-year. The company also boosted its earnings and revenue guidance and increased its stock-buyback authorization.

Parts producer Delphi Automotive (DLPH) has risen 24% since we wrote favorably about it in February, on strong North American vehicle sales and an expanding multiple. Delphi’s high-tech safety technology could feature heavily in the automobiles and light trucks of the future; the company is on the cutting edge of several exciting trends, including self-driving cars.

Dividends and special payouts also helped boost our performance, adding 0.4 of a percentage point to the total return of Barron’s-recommended stocks. For example, dividends added 3.2 percentage points to the total return of Credit Suisse Group (CS) since our February story was published.

Some of our picks have struggled since our bullish stories ran. Airplane-parts maker Esterline Technologies (ESL) is down 16% after missing first-quarter earnings and revenue estimates, and cutting full-year guidance. Forestar Group (FOR), an energy company and property developer, also slid 16%, on disappointing earnings.

ON THE SHORT SIDE, we warned investors away from online lender On Deck Capital (ONDK), which fell 22% in the three weeks following publication of our story. The stock’s eye-popping valuation (then 74 times 2016 earnings) and potential for losses on its loans made us wary.

Barron’s also raised red flags about retailer Dillard’s (DDS), given the concentration of its department stores in energy-producing states, which have been hit hard by the decline in oil prices. Since our March article appeared, Dillard shares have slid 20%. Teradata (TDC), a data-warehousing company, has dropped 12% since we warned investors that lower-cost cloud-computing and data-storage companies were stealing market share from it.

Our bullish 2014 picks, which included several energy names, have trailed the market. Hard-hit oil producers like Tullow Oil (TLW.UK) and Denbury Resources (DNR) have dropped more than 60%. Energy equipment and services companies, such as Halliburton (HAL) and Atwood Oceanics (ATW), also tumbled as energy producers slashed their capital expenditures. Most of those bullish stories came out before U.S. crude fell below $100 in July 2014.

However, some companies we wrote bullish pieces on last year, including medical-testing outfit Exact Sciences (EXAS) and JetBlue Airways (JBLU), saw fat gains.

Bearish stories we wrote last year on 3D Systems (DDD) and Zillow (Z) highlighted significant risks; both stocks plunged after our stories ran. But others, including Amazon.com (AMZN) and insurer AmTrust Financial Services (AFSI), defied our expectations and rose much more than the broad market. Overall, our bearish picks climbed more than their benchmarks, leaving us on the wrong side of the ledger for 2014. Our showing in this year’s first half, however, told a much happier story.

http://online.barrons.com/articles/barrons-picks-are-beating-the-market-in-2015-1436587850

Report Call:

http://online.wsj.com/public/resources/documents/ReportCard071315.pdf