Happy Chinese New Year! What stocks should I buy in the Year of the Tiger?

We are now into the Year of the Tiger and after surviving the "Great Recession" many are wondering what is next for stocks. PIMCO argues that we are going into the "New Normal". Hard to argue with their thesis, but you may receive an inflation adjusted 0 percent return if you invest in their Total Return Fund (All Bonds) for the next few years.

So where to invest? The MSCI All World Index (Ticker: ACWI) is a good place to start, but most people like to pick individual stocks. So the following will give you some ideas on where to find good stocks.

The first place to look is to find your favorite money manager and "cherry pick" some of his or her stocks. The way to do this is to look up the top 10 holdings then see what you like. One of the best small company funds is Longleaf. Their Longleaf Small Cap Fund (LLSCX) was closed in 1989 and has consistently been one of the top performing small cap value funds in the world. As of 12/31/09 its annualized performance is as follows:

1 Year 49.3%, 5 Year 3.1%, 10 Year 8.2%, 15 Year 11.6%

Here is how the Russell 2000 Index has done over the same period of time:

1 Year 27.2%, 5 Year 0.5%, 10 Year 3.5%, 15 Year 7.7%

Some clear outperformance through their stock selection process. Even though we can't buy into their fund anymore we can still "cherry pick" some of their stocks. Here are there top ten stock holdings as of 12/31/09 and their respective weighting in the fund:

1. TW Telecom 10.1%
2. Fairfax Financial Holdings 9.1%
3. Pioneer Natural Resources 7.7%
4. Dillard's 6.7%
5. Fair Isaac 6.2%
6. Washington Post 5.9%
7. Service Corp International 4.8%
8. Wendy's/Arby's 4.7%
9. Everest Re Group 4.6%
10. Olympus 4.4%

Now let's see how these have performed over the last year. What you are looking for is not the ones that have gone up the most, but the ones that haven't. Those have the most potential based on their market research. Of course they aren't always perfect, but have shown to be above average stock pickers over time.

Best place to get his information is Google Finance. Sorry Yahoo. Their site is better.

1 Year Performance from Google Finance as of 2/16/09:

1. TW Telecom (TWTC) Up 73%
2. Fairfax Financial Holdings (FFH) Down 8.25%
3. Pioneer Natural Resources (PXD) Up 182.7%
4. Dillard's (DDS) Up 287%
5. Fair Issac (FICO) Down 5.15%
6. Washington Post (WPO) Down .06%
7. Service Corp International (SCI) Up 85.92%
8. Wendy's/Arby's (WEN) Down 10%
9. Everest RE (RE) Up 14.61%
10. Olympus (OCPNY) Up 119.62%

So based on this you might want to consider FFH, FICO, WPO and WEN. You can do this for other managers as well to get more ideas.

Just a couple of quick tips before you dive in...

1. Don't risk what you can't afford to lose. It's a good lesson that we have learned after the last two bear markets and housing market crash.
2. Don't follow short term advisors. Jim Cramer is one of them. He will pick a stock and a few weeks later he will change his mind. He talks about doing your homework. Your first assignment is to turn him off.
3. Don't follow your friend's hot tip. They are usually wrong and no smarter than you are. Don't confuse a lucky trade with skill. Remember the house always wins. They house is your Stock Broker.

Good Luck! Happy Chinese New Year!