Crossing Wall Street Challenge (2015)

Eddy didn’t get quite enough “Christmas Miracle” to extend his 7-year winning streak of beating the S&P 500 with his Buy List. But it was close. The 2014 Buy List landed at 11.8% for the year versus 13.7% for the S&P 500. Not exactly a disaster. And more importantly, his 9-year (since inception) absolute return is 10.8% vs. 8.0% — a relative return of +2.8%.

Nothing wrong with that.

You can find commentary (and continuous updates) on Eddy’s selections for 2015 here and here.

Start Your (2015) Engines!

We’ll track the 2015 Challenge on the customary dashboards:

Shopping In The Best Places With Our Friends

Walking Main Street is our entrant in this Challenge. Walking Main Street 2014 closed out the year on 12/31/2014 at a portfolio value of $1,175,729.94 — for an annual total return of 17.6% — outpacing the S&P 500 by +3.9%.

Where did we go hunting for our (20) stocks for 2015? Like we said, we like to shop in the same places as our like-minded long term investors. Therefore, we start with the MANIFEST 40, the forty most widely-followed stocks by Manifest Investing subscribers. We sort that by MANIFEST Rank, our combination ranking that includes a dash of return forecast and a dash of quality for a recipe that recognizes the top two characteristics for any investment. We also want to stick to stocks in the top quintile (MANIFEST Rank > 80) as we build for 2015. This yields about (24) stocks.

We then turn to lessons we learn from friends. In this case the inspiration comes from our two-time defending Group Champions in our annual Groundhog stock picking challenge — the Broad Assets investment club of St. Louis.

Why? Because they (and we) believe that stock prices follow earnings. We’ve added the year-over-year change to our shopping list, shown on the accompanying chart as “2015 EPS Delta”. This is nothing more complicated than comparing the analyst estimates for 2015 versus the year-end results for 2014.

Doing this disqualifies companies like Qualcomm (QCOM), Microsoft (MSFT), Coach (COH) and Exxon Mobil (XOM). These are all excellent companies that may have a turbulent year ahead of them. For a typical/traditional long term portfolio we’d look the other way, but this is a one year contest. We believe that stock prices ultimately follow earnings and we also believe/know that the rhinos often overreact to short-term turbulence, in many cases punishing stock prices over the coming year if they believe earnings are cloudy or in jeopardy.

The average 2015 EPS Delta is 12.9% for our universe of stocks.

In that spirit, we went looking “outside” the MANIFEST 40 for a few stocks to substitute for the disqualified ones. We found a group of stocks with solid return forecasts and quality that have good or above-average 2015 EPS Delta expectations: Fossil (FOSL), Mesa Labs (MLAB), Priceline (PCLN) and MSC Industrial (MSM).

After adding these, the overall 2015 EPS Delta for our (20) stocks is 14.3%.

A few stocks were disqualified with return forecasts too close to (or less than) the median return forecast (MIPAR) of 6%. The companies included in this batch were: FactSet Research (FDS), Johnson & Johnson (JNJ), CVS Health (CVS) and Costco Wholesale (COST). Again … nothing wrong with any of these … but we’re looking for outsized return forecasts.

Copa Holdings (CPA) merits a look with the news about Cuba … and T. Rowe Price (TROW) checked in with a very honorable mention.

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