High Conviction Picks

A few weeks ago Seeking Alpha started a regular feature called High Conviction Pick where someone who is presumably qualified gives a stock pick they believe will do well and they lay out the case for their belief.

The point of this post is not to pick on the concept of the series or anyone participating but point out the difficulty in thinking about anything being the top pick.

If you construct a portfolio for yourself or a bunch of portfolios for clients you will have some number of holdings that you think will be manageable to keep track of. Whatever number of individual stocks you think is right, assuming you use individual stocks, one will be the best performer and one will be the worst. Additionally it is unlikely that every pick in a stock portfolio will work out as hoped for.

To make things more complicated top pick could be absolute or relative. For example if you own a mining stock that goes up 50% it might be the name you own that goes up more than any other stock but if at the same time a mining stock ETF goes up 100% then your 50% riser looks like a bad pick in relative terms.

If you believe in top down management then you place more weight on getting the sector or country correct than the stock pick. One sector must be the best performer and one must be the worst. Over varying periods of time someone with average analytical skills will get some sector calls correct but of course even the best analysts will get sector calls wrong, it simply goes with the territory.

Personally I have very little positive to say about the consumer discretionary sector these days. I generally think the consumer is still in plenty of trouble based on lack of job growth, a belief that the foreclosure rate cannot improve for a while and some of the other things that you no doubt read about in many places.

That being said the sector, as measured by the Discretionary Sector SPDR (XLY), is up a lot more than the S&P 500 YTD. Mentally I have bet against the consumer but clients own plenty of XLY and Nike (NKE). My mental bet, so far, is clearly wrong but who cares, by having at least an underweight position the portfolio captures some of the effect. For me I think XLY and Nike are the best way to build the sector but from the top down I expect the sector to lag.

If anyone asked me on January 1st what my top pick would be I would not have said Nike and I still wouldn't now but it is one of the better performers so far and it is possible it will turn out to be the best performer. For all I know the discretionary sector could turn out to be the top sector this year by a mile regardless of anyone's perception of the fundamentals. Anyone willing to bet against the consumer to the extent of excluding the sector, in the example above, would place a greater burden on the rest of the portfolio.