I recommended 10 stocks to buy at the end of 2013 for the year ahead.
I was partly right. Stocks extended their gains in 2014. Over the past year, the benchmark S&P 500 Index has increased 12.2%, the Dow Jones Industrial Average has climbed 8%, and the Nasdaq has risen 14.3%.
But my stock picks did not do as well as the broader market. Thus, readers would have been better off putting their money into funds that track those indexes. My 10 stocks, as a group, have trailed the S&P 500, eking out an advance of only 3.2%.
Portfolio manager June Thornton, based in Seattle, was right when she warned me, after my column was published, not to go into the stock-picking business. June, I won’t repeat my mistake.
Stocks are fundamentally a good investment. Over the past 20 years, the S&P 500 has produced average yearly returns of 9.2%. In 1995, the index soared 37.6%, and it sank 37% during the midst of the 2008 subprime-mortgage crisis. As recently as 2013, the S&P 500 had one of its best showings: It soared 32.4%, including reinvested dividends.
What follows are brief updates to the stocks I recommended on Dec. 27, 2013.
Losers
1. Devon Energy DVN, -1.83% : Devon Energy is down 3.2%, not surprising considering how closely the commodities markets follow similar trends. Though the company focuses on natural-gas assets, it gained by selling assets outside the United States, giving it more flexibility than most other firms with fixed oil and gas assets. Devon has oil and gas reserves in the Permian, Barnett, Anadarko and Eagle Ford areas, to name a few. Relative to the S&P 500 Energy Sector Index, Devon has over-performed by a margin of 5.2 percentage points.
2. Chesapeake Energy CHK, -7.25% : Chesapeake Energy is down 27.8%. Negative factors include high leveraged association with natural gas prices in the marketplace. New executive leadership brought about by the departure of Aubrey McClendon in June 2013 has proven to show a significant shift in the company’s strategy on free spending as well. Relative to the S&P 500 Energy Sector Index, Chesapeake Energy has underperformed by a margin of 19.4 percentage points.
3. AES AES, +1.19% : AES, a highly diversified power and utilities company holding assets in over 20 different countries, is down by 6.8%. In many developing countries where its assets are currently growing, it faces the problems associated with the politics and laws of ever-changing developing nations. Its acquisition of DPL, the parent company of the Ohio utility Dayton Power & Light, is holding back profits. Relative to the S&P 500 Utilities Sector Index, AES has underperformed by a margin of 30.2 percentage points.
4. McDonald’s MCD, +0.72% : McDonald’s is down 3.4%, facing numerous sources of competition in the fast-food landscape, attacks on its franchises from the National Labor Relations Board and being forced to carefully navigate changing consumer tastes and trends. Capital-expenditure costs from implementing new technology to optimize the ordering process are also high, but may have payoffs in the long run. Relative to the S&P 500 Consumer Discretionary Sector Index, McDonald’s has underperformed by a margin of 9.4 percentage points.
5. Kratos Defense & Security Solutions KTOS, +1.98% : Kratos Defense & Security is down 32.3% after missing earnings estimates and revising them in its third-quarter release. The company, which focuses on intelligence, weapons, surveillance and network technologies, has been affected by reduced federal spending on national defense. Relative to the S&P 500 Aerospace & Defense Industry Index, Kratos Defense & Security has underperformed by a margin of 40.6 percentage points.
Winners
6. Pfizer PFE, -0.25% : Pfizer is up 4.3%, but the shares have underperformed pharmaceuticals as a whole. One of its most profitable drugs, Lipitor, has been slowly facing generic competition for the past few years, and the patent rights on the popular drug Celebrex will run out soon as well. Still, high margins on future products could alleviate the loss of business to new competition. Relative to the S&P 500 Pharmaceuticals Industry Index, Pfizer has underperformed by a margin of 27.3 percentage points.
7. Wal-Mart WMT, +1.43% : Wal-Mart is up 9.2%, despite underperforming the consumer staples sector index. It faces decreasing traffic at retail stores, but it is adding new areas such as commercial banking, as well as neighborhood market and express stores. Walmart is still the clear retail leader. Relative to the S&P 500 Consumer Staples Sector Index, Wal-Mart has underperformed by a margin of 4.2 percentage points.
8. Intel INTC, +2.31% : Intel is up 42.3%, holding a substantial share of the semiconductor and microprocessor market. Intel’s vast R&D budget and capital enable it to stay at the forefront of industry as it continues to invest into areas other than personal computers, such as mobile. But competition may make the company’s near control over the microprocessor market difficult to maintain in the coming years. Relative to the S&P 500 Information Technology Sector Index, Intel has outperformed by a margin of 23.3 percentage points.
9. Microsoft MSFT, +0.67% : Microsoft is up 28.4%, with strong growth throughout its enterprise businesses and cloud-software platform. As the company continues to revitalize itself with core product offerings, it is still forced to bear the costs of mobile-device development as it faces big competition from other multinational electronics companies in the consumer market. Relative to the S&P 500 Information Technology Sector Index, Microsoft has outperformed by a margin of 9.4 percentage points.
10. Wells Fargo WFC, +0.96% : Wells Fargo is up 20.8%, having performed well relative to the rest of financial-industry leaders. As one of the nation’s best-positioned and largest banks, Wells Fargo commands the ability to cut costs, such as operating expenses, making it even more competitive in the long term. Relative to the S&P 500 Financials Sector Index, Wells Fargo has outperformed by a margin of 7.7 percentage points.
What have I learned? For the average person, investing with indexes is a safer route than stock picking. Systematic problems with individual stocks, such as the turmoil that occurs after the transition of executive leadership, can be alleviated through a diversified index. Although a heavily diversified and closely monitored portfolio that takes on more individual risk can see significantly higher returns over the long run, for most casual investors, a safer index investment will win out most of the time.
