Top 10 Buys and Sells by the Ultimate Stock-Pickers

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Top 10 Buys and Sells by the Ultimate Stock-Pickers by Greggory Warren, CFA, Morningstar

The rally in U.S. equity markets over the past five-plus years has not only led to a tripling of the value of the S&P 500 TR Index–from an intraday trading low of 673.88 on March 9, 2009, to an all-time trading high of 2,005.04 on Aug. 26, 2014–but has seen the market advance with relatively few corrections (of more than 5%), the last one taking place during the back half of 2012. While this has been good for investors overall, it has limited the options for our Ultimate Stock-Pickers, many of whom are now bereft of ideas in which to put new money to work.


Source: Morningstar Analysts

Looking back over the past decade, we’ve seen our universe of covered stocks continue to increase in two separate calendar years after the S&P 500 rose more than 25% during the preceding year (much as it did last year). During 2010, the market increased another 15% after gaining more than 26% during 2009, with Morningstar’s stock coverage universe peaking at about 1.10 times our analyst’s fair value estimates during the year. It could be argued that the 2010 gain was nothing more than the S&P 500 continuing its climb out of the depths of the 2008-09 bear market. However, we saw the same thing happen during 2004. Coming off of a nearly 29% gain in 2003, the market increased close to 11% that year, with Morningstar’s stock coverage universe approaching 1.15 times our fair value estimates near the end of 2004. Based on these two examples, we have believed for much of 2014 that a 7%-12% gain in the value of the S&P 500 this year was within the realm of possibilities. With the market up about 10% at the end of August, we’re already in the upper half of that targeted range. Our universe of covered stocks continues to imply that we’re only modestly overvalued, so the possibility remains that the markets could move higher from here if we assume a peak of 1.10-1.15 times our analysts’ fair value estimates.

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