The 3 Most Valuable Traits Of Any Winning Stock

StreetAuthority Network

I probably don't have to tell you this, but the odds are stacked against you when it comes to "beating the market." 

By nearly 6 to 1 in fact...

Investment analysts, advisors and fund managers -- the so-called experts -- spend their entire working lives and billions of dollars on research vowing to "beat the market" in any given year -- yet the vast majority of them fail...

Just look at mutual fund industry's record. In the past three years, just 14% of actively-managed mutual fund managers matched or exceeded the market's performance according to Standard & Poor's.

So how are the small minority beating the market?

After years of research, we've found that more often than not, companies with just three basic characteristics are the ones that consistently beat the S&P 500...

They often pay much higher dividend yields than the S&P 500 too. In fact, eight out of 10 stocks chosen for our "Top 10 Stocks For 2014" report paid a higher dividend yield than the S&P 500. A few even carried yields over 4.3% -- more than twice the S&P 500's yield.

Don't believe it's as simple as three traits to find market-beating stocks? Consider our track record. 

Over the years, our annual report of StreetAuthority's Top 10 Stocks for the coming year has beaten the market 7 out of the past 10 years... We've also racked up some phenomenal homeruns from some of the picks. 

In 2008 -- a year marked by one of the worst sell-offs in history -- we saw a gain of 45.8% on our recommendation of Panera Bread (Nasdaq: PNRA). The S&P 500 lost 37%.

In 2009 we earned 72.1% on shares of CPFL Energia (NYSE: CPL), a Brazilian utility that soared as the S&P gained 27%. 

In 2010 as the S&P clawed back with a modest 15%, we selected not one, but two stocks that gained more than 100% on the year -- Skyworks Solutions (Nasdaq: SWKS), up 101.8%, and Silver Wheaton (NYSE: SLW), up 159.9%.

Last year we offered up two more stocks -- Brookfield Infrastructure Partners (NYSE: BIP) and Magellan Midstream Partners (NYSE: MMP) -- that returned more than 50% and 30%, respectively, for the year, despite the S&P being up just over 15%.

Here's a sample of the Top 10 Stocks that had homeruns over the years...

Symbol Year Return
IGT 2006 +52.1%
CME 2007 +35.4%
BRK-B 2007 +29.2%
PNRA 2008 +45.8%
CPL 2009 +72.1%
DEM 2009 +58.1%
SLW 2010 +159.9%
SWKS 2010 +101.8%
BIP 2012 +53.7%
MMP 2012 +31.5%

In 2013 so far, stocks from our report have gained 34.6%... 30.2%... and 37.1%. The S&P 500 is up just half that year-to-date.

So how is this possible? How can you find stocks that can beat the market so often?

It's simple. The Top 10 Stocks research team and I focus heavily on companies that have one or more of the following traits:

1. Companies that own irreplaceable assets: 
What do things like pipelines, hydroelectric dams and utility services all have in common? They are all irreplaceable assets. Another company can't simply come along and build a competing business. And these assets aren't about to be replaced by some new technology. But when you find the sort of stocks that give you access to irreplaceable assets, they often end up being some of the most lucrative investments to own for the long term.

2. Companies that have excellent customer loyalty: 
The ability to retain a loyal customer base and keep those consumers buying your products for years is a hallmark of the world's best businesses. Firms that can lock in a loyal base generate strong free cash flows and superior profit margins, putting them in a better position to return money to shareholders through dividends and share buybacks. 

3. Stocks with enormous shareholder yields: 
You may have heard me talk about the concept of 'shareholder yield' before. What we believe to be most profitable for the vast majority of investors is a metric that most people have never heard of. We call it "shareholder yield."

Shareholder yield adds together the dividends a company pays, its share buybacks, and the debt it pays down. In other words, shareholder yield gives you 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.

Of course, all of these points make sense -- strong companies with irreplaceable assets, loyal customers and that take care of their shareholders should do better over the long-run. It doesn't take a Ph.D to understand that.

It's simple, but it works.

That said, no one can pick winners all the time. While our annual Top 10 Stocks recommendations have beaten the market 7 out of the past 10 years, and Buffett's Berkshire Hathaway has beaten it 6 out of the past 10, even the seemingly strongest companies aren't guaranteed to deliver a positive return. 

But we think if you invest in companies with one or more of these simple traits, you have a good chance of making money without an overly complex investing strategy.

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