Ten Ultimate Stock-Pickers' Stocks to Consider in 2010

By Greggory Warren, CFA | Senior Stock Analyst

With just 10 days left in 2009, we figured it would be a good time to look back through some of the key lessons we've learned since we relaunched Ultimate Stock-Pickers, and take the opportunity to pass along 10 names we've highlighted in our articles this year that are still worth considering as we move into 2010.

As you may recall, our primary objective with Ultimate Stock-Pickers has been to cross-check Morningstar's own stock research against the opinions of professional money managers (which we garner through the holdings, purchases, sales, and commentary derived from their investment portfolios) and come away with investable ideas to highlight for investors. Instead of presenting these stocks ideas in the form of a portfolio, we've focused the majority of our efforts on securities that managers are actively buying and selling, producing a quarterly listing of top 10 purchases and sales, as well as articles highlighting conviction buy ideas (and holdings), which we define as purchases (and holdings) that represent a larger than average position size for a portfolio, and new money purchases and outright sales by our top managers.

Have We Been Able to Generate Investable Ideas?
Looking back over the articles we've published during the last nine months, we found more than fifty different 5-star stocks that were highlighted by the members of The Ultimate Stock-Pickers Team. When combined with the 4-star stocks that were also mentioned by our analysts, the number of securities grows to more than eighty. While it would easy to point to wildly successful picks like  Burlington Northern , which we highlighted in May of this year, and mentioned several more times before it was ultimately purchased by  Berkshire Hathaway (BRK.A) / (BRK.B) for $100 per share in November, it would distract from the multitude of other ideas we were able to uncover for investors.

Most-Mentioned Stocks in Ultimate Stock-Pickers During 2009

Stock Price and Morningstar Rating data as of 12-17-2009

When looking back at the securities that were mentioned most frequently during the course of the year, it wasn't too surprising to see that six of the 10 most-discussed stocks by our analysts during 2009 were also top-10 holdings for our Ultimate Stock-Pickers. Owned by 15 of our 26 managers during the year,  Johnson & Johnson (JNJ), which traded in 5-star territory up until the second week of December, has increased close to 25% in value since we first mentioned it in May of this year.  Procter & Gamble (PG), which is held by 13 of our top managers, is another stock that only recently moved into 4-star territory, having rallied more than 25% since we first highlighted the company seven months ago.

While the returns for both securities were comparable to the return for the S&P 500 Index (SPX) during the same time period, we outdid ourselves with  Pfizer (PFE) and  Microsoft (MSFT), which are up 35% and 45%, respectively, since we first talked about them (compared to a 25% and 20% gain, respectively, for the benchmark index). Microsoft had the bigger impact for our top managers, though, being held in 16 portfolios during the year versus only nine portfolio holdings for Pfizer. As for the two other stocks that were top-10 holdings for our Ultimate Stock-Pickers, Berkshire Hathaway and  ConocoPhillips (COP) were a bit of a disappointment. Berkshire was up just 8% (versus an 18% gain for the market), while ConocoPhillips posted a 20% gain (relative to a 25% increase in the market), since we first highlighted them.

The same pang of disappointment holds for  Becton Dickinson (BDX), which we first mentioned at the beginning of June and highlighted in two in-depth conversations in late June and early August with our analyst who covers the stock, Alex Morozov. While we were encouraged by the fact that Berkshire Hathaway had taken a stake in the firm during the second quarter, it hasn't led the stock to outperform, with shares of Becton Dickinson rising just 13% (versus an 18% gain for the market) since we first mentioned it in Ultimate Stock-Pickers.

We can at least take some comfort with  Novartis (NVS) and  Comcast , both of which have significantly outperformed the benchmark since we first talked about them. And while  Medtronic (MDT) posted market-like gains from the day we first mentioned it, it was just one of a collection of medical products firms that we've highlighted during the past six months--a list that includes: Becton Dickinson,  Boston Scientific (BSX),  Covidien ,  Smith & Nephew (SNN),  Stryker (SYK),  Thermo Fisher Scientific (TMO),  Waters Corporation (WAT), and  Zimmer Holdings (ZMH).

10 Ultimate Stock-Pickers' Stocks to Consider During 2010

Stock Price and Morningstar Rating data as of 12-17-2009

We'd also be remiss if we didn't highlight 10 stocks (in addition to Novartis and Pfizer) that our analysts believe are still buyable at today's prices, which we uncovered as we were sifting through all of the 4- and 5-star stocks mentioned in this year's articles. Not surprisingly, the list is chock full of names from the health care sector, which has been a big area of focus for our managers during the latter half of 2009. Given that we'd had so little luck of late finding truly investable ideas in the top holdings, purchases and sales of our Ultimate Stock-Pickers, it's interesting that we uncovered as many 5-Star stocks as we did from the holdings of our top managers. For some perspective, as of the market close on December 17, 2009, there were only 35 stocks rated 5-stars out of Morningstar's coverage universe of more than 1,700 firms.

Sell Ideas Have Been Few and Far Between
While we feel that we've done a decent job of digging up buy ideas to pass along to investors, our ability to highlight stocks that should be sold has been less clear. Part of this was due to the state of the markets during the first part of the year, when managers were selling stable cash-flow generators to either meet redemption requests or to put money to work in beaten-down names in other sectors of the market. Although things have adjusted as the year has progressed, with our top managers getting into a more normal pattern of selling (which is reflected in either subtle trimmings or outright sales from their portfolios), there has been a lack of true 1-star sell calls that we could pass along to investors.

Another issue we continue to grapple with is the timeliness of the information we receive from the mangers on our Investment Manager Roster. As you may recall, when we relaunched Ultimate Stock-Pickers, we noted that there was one notable drawback to the concept, which was that in most cases the data we rely on is not as timely as we would like it to be, as investment managers have 45 days from the end of each quarter to file their 13-F with the SEC. While we've been able to alleviate some of this time lag by cross-checking the data we collect against our own research, which allows us to generate more timely commentary and investment ideas, we've run into a few cases--namely,  Davis NY Venture (NYVTX) and  WHG Large Cap Value (WHGLX)--where a fund's fiscal year-end, as well as the length of time they take to file, has become a bit of a burden.

As such, over the next couple of weeks we're going to take a much deeper look at the funds represented in the Investment Manager Roster and see if we can't improve the mix to the point where we're getting the most timely information we can from our top managers. Having been able to retrieve monthly holdings data from funds like  Amana Trust Growth (AMAGX),  Amana Trust Income (AMANX), and  Columbia Dividend Income (GEQAX), we'd like to see if there are other top-performing managers we may have overlooked who provide more timely data than we're receiving from some on our current list.

With that in mind, we'll also be looking at the performance of the managers on our Investment Manager Roster, which has run the gamut from "truly impressive" at the  Yacktman (YACKX) fund, (up more than 55% year to date), to "something's gone wrong" at  Chase Growth (CHASX) fund, which has generated only an 11% return during a year when the market is up close to 25%, and the large-cap growth fund category as a whole is up more than 32%. While we've been willing to cut some of our top managers a bit of slack this year, in light of the impact that the bear market had on their long-term track records, we think its time to take a deeper look at some of last year's underperformers.

As you may recall, when we relaunched Ultimate Stock-Pickers we had stated that we wanted to be more proactive with the Investment Manager Roster than others had been in the past, moving managers off the list and replacing them with better-performing peers whenever we felt that such a move was warranted. We continue to believe that this type of flexibility is necessary for us to reach our primary objective with Ultimate Stock-Pickers, which is to build and maintain a list of top managers that can be used to consistently generate high-conviction buy and sell ideas for investors.

Disclosure: Greggory Warren own shares in the following securities mentioned above: Johnson & Johnson, Procter & Gamble, Amana Trust Growth and Amana Trust Income.