Tuesday, January 03, 2006

The Cohan Letter +23.3% in 2005

The Cohan Letter, my monthly investment newsletter, had a good year in 2005 – stocks mentioned there were up an average of 23.3% compared to 3% for the S&P 500.

Here are its three top-performing stocks for 2005 (through 12/30/05):
  • Whole Foods (WFMI): +73.1% from $44.71 – mentioned at the end of January -- to $77.39;
  • Express Scripts (ESRX): +67.7% from $49.98 – mentioned at the end of June -- to $83.80; and
  • Digital Insight (DGIN): +59.5% from $20.07 – mentioned at the end of April -- to $32.02.

2005 continued a streak of good fortune for my public stock picks. Since January 1998, when I began promoting my first book, The Technology Leaders (Jossey-Bass: 1997), my public stock recommendations have increased at an annual average of 74% compared to 5% for the S&P 500. My picks were made public through various media including appearances on CNBC and CNN, in print at Business Week and Fortune, online at sites such as BusinessWeek Online and TheStreet.com, and, since 2003 in The Cohan Letter.

In each year since 1998 – with the exception of 2003 – these public stock picks have outperformed the S&P 500. Here are my one, three, and five year returns compared to the S&P 500:

  • 2005: 23.3% (S&P 500 +3%)
  • 2003-2005: 22.3% (S&P 500 +13.7%)
  • 2001-2005: 45.8% (S&P 500 +1%)

Investment Approach

I use fundamental analysis to select investments. However, I adapt my approach to changes in overarching investment themes. For example, since 1998, I’ve identified three distinct eras which presented different investment opportunities:

  • The Internet era. High returns between 1998 and 2000 resulted from buying technology and Internet stocks as explained in e-Stocks (HarperBusiness, 2001);
  • The era of collapse. In 2001 and 2002, high returns came from selling short the stocks of debt-laden companies in danger of violating their contracts with lenders; and
  • The trendless era. High returns between 2003 and 2005 resulted from buying stock in industries with strong demand growth and pricing power such as career education, freight transportation and IT outsourcing.

The Internet Era

For example, in 1998, my six picks returned an average of 69%. This return was generated by suggesting leaders in the most attractive Internet market segments. Here are two:

  • Cisco Systems (CSCO). Due to its leading share in the attractive Internet infrastructure segment, I suggested that this stock could rise in a July 28, 1998 CNBC appearance when it was trading at $48. It closed the year at $92.81, yielding a 93% return; and
  • Check Point Software (CHKP). Due to its leading share in the attractive Web security segment, I suggested that this stock could rise in a September 29, 1998 appearance on CNBC when it traded at $22.56. It ended 1998 at $45.81 for a 103% return.

The Era of Collapse

For example, in 2002, my picks returned an average of 81%. The 81% return was the average of the returns of four short picks and four long ones. As the list below illustrates, my short picks in 2002 were far more valuable than my long ones. Here are two of each:

  • VeriSign (VRSN). I suggested that this stock could tumble in a BusinessWeek Online article on March 12, 2002 when it was trading at $32.38. It closed the year at $8.42. Covering the short position then would have yielded a 285% return;
  • Williams Energy (WMB). In an article in TheStreet.com on June 5, 2002, I questioned management’s credibility. At that time, WMB was trading at $9.12 a share. It ended the year at $2.20. Covering the short position then would have earned a 315% return;
  • Apollo Group (APOL). In an October 22, 2002 article published in BusinessWeek Online, I argued that this education company was benefiting from the recession. At that time, APOL was trading at $41.92 a share. It finished 2002 at $44.25. Selling shares then would have earned a 6% return; and
  • Bed, Bath & Beyond (BBBY). In an October 22, 2002 article published in BusinessWeek Online, I argued that this home furnisher benefited from 2002’s housing boom. At that time, BBBY was trading at $35.46 a share. It closed the year at $34.99. Investors selling shares then would have lost 1% of their investment.

The Trendless Era

For example, in 2003, my 36 picks returned an average of 24%. This return was generated by suggesting companies in specific industries with growing demand and rising prices. Here are two:

  • Cognizant Technologies (CTSH). Due to demand for outsourcing IT, I suggested that this stock could rise in the February 2003 issue of The Cohan Letter when it was trading at $23.37. It closed the year at $45.64, yielding a 95% return; and
  • Career Education Corp (CECO). Due to growing demand for adult education, I suggested that this stock could rise in the January 2003 issue of The Cohan Letter when it was trading at $23.22. It ended 2003 at $40.15, yielding a 73% return.

3 Comments:

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