Seven Buy-And-Hold Stock Stars

Forbes.com: Matthew Schifrin, 02.01.07

Thanks to a resurgent stock market, ubiquitous technology and dirt-cheap commissions, America has become a nation of traders again. There are now an estimated 35 million online brokerage accounts, compared with roughly 13 million at the height of the dot-com bubble in 2000.

Meanwhile, sub-$5 commission rates can easily be had, and trading volume continues to climb. Click on almost any financially oriented Web site or turn on financial TV shows like Jim Cramer's Mad Money or Fox's Bulls & Bears, and you're are being told to buy stocks like Sirius Satellite Radio one day and sell them a month later. When stocks like Google often swing 10 points in day, it is no wonder that ''buy-and-hold'' investing has been largely forgotten by individual investors.

Two entrepreneurial stock-picking community Web sites, Marketocracy.com and ValueForum.com, have set out in search of their own champions of the dying art of buy-and-hold investing. Each year for the last few years they have been running contests asking participants to pick only five stocks and hold them for 12 months.

As always, their respective contests yield some pretty impressive pickers. For 2006, the top seven buy-and-hold stock pickers had annual returns ranging from 45% to 122%. By comparison, the average diversified stock mutual fund manager, according to Lipper, had a total return of 12.37% last year.

In 2006 the top honors went to Alan T. Hill, a member of ValueForum.com, a subscription stock-picking community of 1,500 members. Hill, 67, retired from a career in educational technology a few years ago and moved to Placitas, N.M., where he built a custom pueblo-style home using the proceeds of a single stock investment.

Much of Hill's 122% total return for 2006 can be attributed to his purchase of Winnipeg, Manitoba-based Hudbay Minerals, a producer of zinc. The stock advanced 271% last year thanks to an explosion in the demand for zinc from China and India. Zinc is used in the formation of galvanized metals and is widely used in construction and automobile production. Hill's second-best performer, Brazilian miner Yamana Gold, gained 100% over the course of the year. Hill's worst pick last year was Trinidad Drilling, a $1.1 billion oil and gas drilling company operating in Western Canada. Trinidad fell 4.7% in 2006.

Like many other value-oriented buy-and-hold types, Hill uses the Web to read everything he can about companies, including Securities and Exchange Commission filings. Hill claims that once he zeros in on the right stock, he tends to hold for a very long time. In fact one of his best investments, Bancolombia, has been in his portfolio since 1999.

If there is any common investment theme among the top-performing armchair gurus, it would be that most of them have significant exposure to natural resources stocks, including mining and energy companies. In fact, certain stocks, like Yamana Gold, Desert Sun Mining and Western Silver, were owned by several of top seven portfolios.

Last year was the third year that Robert Candelaria, 51, finished in the top ranks of Marketocracy.com's buy-and-hold stock picking challenge, dubbed the ''Castaway Stocks'' contest. Candelaria, who goes by the screen name "Stylecouncilor" on Marketocracy, had a total return of 87.4% in 2006.

His portfolio's five stocks for 2006 were also heavily concentrated in metals. Candelaria's best stock for the year was Canadian-based Brazilian mining company Desert Sun Mining, up 213% after it was acquired by competitor Yamana Gold in April. Other winners include Northgate Minerals, up 88%, and Mesabi Trust, a company whose income is derived from iron ore mining in Minnesota. Mesabi climbed 74% in 2006.

Los Angeles-based Candelaria is contrarian in his approach and has little patience for technical analysis. When choosing stocks, he concentrates on finding the right sector first and then drills down to equities with relatively attractive price-to-sales ratios and return on equity. Like many other online investors, he relies mostly on SEC documents for information. A good portion of his personal portfolio is in micro-cap stocks, but he largely avoided purchasing them in Marketocracy's contest.

Candelaria began investing full time a few years ago after he sold his ladies' beach and surf wear apparel business. He still is an avid surfer and practitioner of Shotokan karate. He spends at least four hours a day online pouring through company documents researching his picks and chatting with other investors.

Indeed, most top armchair investors do their own research. Andrew Swann, 52, was the third-best performer among the buy-and-hold contestants, with a 2006 return of 67%. Swann is widely regarded on ValueForum.com as the resident expert on junior gold mining stocks. Not only does Swann scour SEC documents and company Web sites online, but he also spends hours a day calling up executives from his voice-over-Internet Protocol phone and occasionally meets with CEOs.

Swann will also tour the actual mines. His most recent trip took him from his home in San Miguel de Allende, Mexico, to Desmaraisville, a mining town near Bachelor Lake in northern Quebec. There he visited Metanor Resources, a gold mining company listed in Vancouver.

Swann is a refugee of the oil patch in East Texas. During the oil bust of the 1980s, he lost his job and moved down to Mexico to be a real estate developer. About 10 years later he began investing full time, mostly in gold stocks. He is still a gold bull.

''There is a ton of demand from India and China, where the government has a mountain of trade surplus dollars,'' Swann says. ''They are buying gold and euros.'' He believes that at $625 per ounce, there is perhaps a 15% downside risk in gold, but he is confident that it will rise to $900 an ounce.

Last year, Swann's top pick was Western Silver, which was up 161% after it was acquired by Glamis Gold, which was subsequently acquired by Goldcorp. His second-best pick was Yamana Gold, which doubled.

The fourth-best stock picker is Miami-based Bill Gordon, a former advisory letter analyst who spends from 5 a.m. until 9 p.m. each trading day monitoring his investments and researching stocks from his home office. Like Swann he focuses on stocks that aren't well covered and will talk to management and competitors.

In 2006 Gordon's best stock was Advocat, a troubled nursing home operator that was in the midst of restructuring. After it shed non-core assets, earnings rebounded, and its stock climbed 205%. Today Gordon is a raging uranium bull, and he also likes the Pickerington, Ohio-based maker of Dearforms slippers, R.G. Barry.

Retiree Jim Cook, 64, is another guru who owes much of his 2006 success to precious metal stock, including Yamana Gold and Western Silver. Cook also has been a big buyer of shipping stocks, including Ship Finance International, which returned 53% in 2006. Cook ranks fifth overall among "buy and hold" contestants.

In 1995 when Cook was 52, he quit his engineering job at Florida Power & Light, sold his house in Fort Myers, Fla., and began touring the country in an RV with his wife, who also quit her job. After a few years of traveling, they decided that they loved the RV lifestyle and concluded that the only way they could afford to live that way was to invest their savings and retirement money wisely while on the road. Before Cook bought an RV with Web capability, he and his wife would stop at libraries along the way for Internet access and research.

A decade later, Cook has survived the dot-com stock bust and now invests mostly in energy, metals and yield stocks. He claims he has grown his nest egg nearly ninefold in the last 10 years. Two years ago, he sold the RV and bought a home in scenic Port Townsend, Wash. When he his not investing, he enjoys flying his plane over the verdant cliffs along the Olympic Peninsula.

Not all of the top armchair gurus bet the ranch on hard asset stocks. Denver-based Marketocracy member Gary Tucker specializes in buying the American Depositary Receipts (ADRs) of overseas companies, exchange-traded funds and closed-end funds. Thanks to investments like Templeton Russia & Eastern European Fund and Russian wireless telecom giant Vimpel-Communications, both up about 80%, Tucker's buy-and-hold portfolio ended 2006 up 48%.

Another strong stock for Tucker has been Naspers, a company he considers to be the ''Time Warner of South Africa.'' Today Tucker is buying the ADRs of one of Mexico's biggest home builder, Homex Development. When selecting stocks, Tucker focuses mostly on price-to-earnings-growth ratios, and he is fanatical about reading annual reports so he can get a better read on management's strategy and emphasis.

Kai Petainen, a 32-year-old computer room manager at the University of Michigan Business School, had a total return of 45% in 2006. He developed his strategy listening to business school professors as they lectured students in his lab. He screens for stocks using academic theories, which mostly boils down to companies with low price-to-book ratios, low price-to-earnings ratios, low short interest and positive earnings momentum. One of his 2007 picks is KT, a wireless broadband and telecommunications company in South Korea.

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