(By Rich Bieglmeier) Performance persistence is well studied and shows that stocks that have outperformed in the last year have an increased probability of outperforming next year, too. In a 108 year study of stock performance around the globe, Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School found "momentum appears to have an inordinate and unexplained impact on the behaviour of investment markets that contradicts the efficient market theory." Ouch that has to really hurt the asset allocation types and probably partially explains why most money managers underperform.
In fact, Dr Paul Marsh said, "We remain puzzled (by these findings) and we are not the only ones; most academics are vaguely embarrassed by this," according to Wikipedia – yeah we know, sourcing Wiki?
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The same effect is also known to impact sector performance. With that in mind, iStock will see if we can find some winners for 2013 from the top four performing sectors of 2012 – so far. They include consumer cyclicals, financial services, healthcare, and real estate.
As we do with these situations, iStock cranked up the trusty stock screener and looked for companies from the top preforming sectors that have outperformed the S&P 500 for the past 52 weeks – 1,515 symmetrical results and way too many to any investor to own.
The next step is to breakdown the qualifying list by some our favorite metrics. First up, Warren Buffet and the Investor's business daily like stocks with high Return-on-Equity, if it's good enough for Warren and William O'Neil, it is good enough for us. We'll use the IVBD's study and scan for those with 17% and higher – 199 left.
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According to Motley Fool, stocks with a PEG ratio of one or less outperform the market in the next one to three years. Let's see where that takes us – 56 remain on the board.
iStock likes companies with a history of earnings surprises. Various studies show a phenomenon called post earnings drift, which basically means that stocks with plus surprises tend to outperform the market going forward. We'll screen for companies that bullishly beat the street last time out, have an average eps surprise of greater than zero for the last two and four quarters – 26, still too many, but getting there.
Money Manager and Forbes contributor Ken Fisher says he prefers companies that trade for one or less on a price-to-sales basis and the survey says – 11 remain, which is manageable enough.
Based on a 108 year study, some of the favorite criteria from Warren Buffet, William O'Neil, Ken Fisher, Motley Fool, and iStock, these 11 names have a great chance to outperform in 2013.
- Apollo Group (APOL)
- Cigna Corp (CI)
- Dollar General (DG)
- Delphi Auto Plc (DLPH)
- Ensign Group (ENSG)
- Express Scripts (ESRX)
- Global Cash Acs (GCA)
- General Motors (GM)
- Gentiva Health (GTIV)
- Macys Inc (M)
- Tenneco Inc (TEN)