One company makes wireless chips for Apple's (Nasdaq: AAPL) iPhone. Another company helps finance silver mining projects in exchange for a future piece of the action. A third owns and operates utility, transportation and energy businesses around the world.
The common denominators?
Each has rewarded investors with market-trouncing gains in recent years. And each is an alumnus of StreetAuthority's annual "Top 10 Stocks" list.
Wireless semiconductor maker Skyworks Solutions (Nasdaq: SWKS) posted a gain of 101.8% in calendar-year 2010 after a listing in the "Top 10 Stocks" report. Ditto for Silver Wheaton (NYSE: SLW), which soared a whopping 159.9%. Last year, Brookfield Infrastructure Partners (NYSE: BIP) more than doubled the gain in the S&P 500 index after rising 33.2%.
The good news: There's more where those came from. StreetAuthority's just-released "Top 10 Stocks for 2014" report includes the 10 stocks that we believe have the best potential to beat the broader market in the coming year.
I'll reveal the name of one of those stocks in a moment. First, some background ...
The stocks that make up "The Top 10 Stocks of 2014" have returned an average gain of 129.5% during the past five years, almost triple the gain of the S&P 500 during the same period. This year's recommendations were compiled by Top 10 Stocks Chief Strategist Elliott Gue and his staff.
If a stock is recommended in the Top 10 Stocks advisory or as one of the picks in the annual "Top 10" list, odds are it meets one or more of the following traits:
-- It owns irreplaceable assets. What do pipelines, hydroelectric dams and utility services have in common? They are all irreplaceable assets. Another company can't simply come along and build a competing business. Investments in these companies typically bode well for the long term.
-- It enjoys a high level of customer loyalty. Companies that can lock in a loyal customer base -- either by consumer preference or because there are few alternatives for customers to choose from -- tend to generate strong free cash flows and superior profit margins. This puts them in a better position to return money to shareholders through dividends and share buybacks.
-- It offers enormous shareholder yields. This is a metric that adds together the dividends a company pays, its share buybacks, and the debt it pays down. In other words, shareholder yield offers a real picture of how much cash a company is returning to its owners. Studies prove that companies with the highest shareholder yields tend to outperform the broader market.
Against those criteria, 13 of the 14 stocks in the Top 10 Stocks newsletter portfolio are in the green. Nine of those picks are posting double-digit gains of as much as 91% over holding periods ranging from a little more than two years to less than six months.
The track record of the annual list is equally as impressive. Since the inaugural edition in 2003, "top stocks" have beaten the market 7 out of 10 years (the jury is still out on the current year). That beats the performance of Warren Buffett's Berkshire Hathaway (NYSE: BRK) by one year during the same span.
You can learn the names of two of the top stocks for 2014 by clicking here. Below, Elliott reveals another of his favorite top stocks for 2014.
Bob: One of your top 10 stocks for 2014 is a carryover from last year's report, Brookfield Infrastructure Partners. What is it that you like about this particular partnership?
Elliott: Brookfield Infrastructure is a classic example of a company with "irreplaceable assets."
The partnership currently owns more than $20 billion in investments across its three main business groups, including utilities, transportation, and energy. In its utilities business, for example, the firm operates a coal terminal in Australia as well as electric transmission networks across the Americas. And in transportation, the company owns a 3,000-mile long freight rail network in Australia, primarily used to transport the nation's resource wealth from inland locations to coastal ports for exports.
Just getting regulatory approval to build a new coal terminal or railway in Australia would be a lengthy process in itself. Construction is difficult and expensive due in part to periodic labor shortages and a spate of extreme weather over the past few years. These assets would be time-consuming and expensive to replace, so Brookfield owns an asset that no company is likely to try to duplicate. These assets also offer stable cash flows with little or no sensitivity to economic conditions and commodity prices.
Bob: How does your current market outlook jibe with the types of stocks you're recommending these days?
Elliott: When we spoke last spring, I was concerned that we could have some bumps in the broader market over the course of the summer, and we did see that in the form of two modest sell-offs for the S&P 500. There are some important headline risks facing stocks in the near term, including how the U.S. Federal Reserve handles the wind-down of its quantitative easing policy, the decision over who will replace Fed Chairman Ben Bernanke, the ongoing potential for intervention in Syria and, most worryingly, a fight over raising the U.S. debt ceiling that should reach a head before mid-October.
The other concern, voiced in some corners, is that interest rates in the United States are likely to continue rising over the coming year, putting pressure on income-oriented stocks. While rising rates can be trouble for high-yield stocks, companies that pay a yield AND offer the prospects of dividend growth over time have held up well in rising interest-rate environments.
In Top 10 Stocks, I tend to focus on companies that can thrive in virtually any economic and interest rate environment. While all of my recommendations pay dividends, I don't recommend stocks that pay out sky-high yields with little or no prospects for growth. Instead, I look for firms that offer a combination of a solid yield and a history of boosting their payout over time.
I also like companies with a long history of returning capital to shareholders, effectively paying their owners for holding the stock. There are many ways companies can do this, including paying dividends, buying back stock or paying down debt to reduce their financial risks during downturns.
Bob: I know you've got a special issue of Top 10 Stocks planned for October. Can you give us a preview?
Elliott: I think interest rates are likely to rise generally over the coming years, putting pressure on bonds and high-yield stocks that have little prospects of dividend growth. This is an important shift because both of these groups have been big winners over the past decade.
I spent some time scouring the markets looking for companies that can thrive in a rising interest rate environment and it struck me that some families have remained wealthy for generations because they owned what I call "legacy assets." These are assets so valuable they're able to stand the test of time, retaining their value in just about any economic and interest rate environment.
One company I'm currently looking at has a nearly 120-year-old brand that's continued to thrive through two world wars, the Great Depression, high inflation and sky-high interest rates through the 1970s and, of course, the most recent economic downturn and financial crisis. This "legacy asset" has been a household name for Americans for more than a century, and the stock continues to perform in good times and bad.
Amazingly, the stock outperformed the S&P 500 by 28 percentage points in 2008, the worst year of the financial crisis, and then proceeded to outperform the market again in the bull market that kicked off in March 2009, returning nearly 200% since that time, compared with just 125% for the S&P 500. That's the sort of consistency that owning legacy assets can bring.