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Highly Correlated Stocks Still Able to Outperform, Birinyi Says

Cummins Inc., VMware Inc. and Chipotle Mexican Grill Inc. show that stock pickers can still outperform the market even as shares move in the same direction as benchmark indexes at near record rates, according to Birinyi Associates Inc.

The Westport, Connecticut-based research firm identified 15 stocks in the Russell 3000 Index that, on average, outperformed the index by 70 percentage points this year while moving in the same direction as the gauge 58 percent of the time.

Since climbing to a record 72 percent on July 16, the correlation between the Russell 3000 and its stocks has remained near that level, Birinyi data show, with the gauge’s companies moving together with the index 63 percent of the time over the past 50 days. That’s almost twice the average of 32 percent over the past 30 years. Currently, 95 percent of Russell 3000 stocks have a 50-day correlation coefficient greater than the historical average.

Picking individual stocks is still “the key to equity investing” despite the rising correlations, Birinyi’s report said. The Russell 3000 rose 5.9 percent in 2010 through yesterday, trailing gains in Cummins, VMware and Chipotle by at least 91 percentage points.

‘Home-Run’ Stocks

“Now that we know most stocks do the same thing every day, does that mean we should just throw in the towel?” Cleve Rueckert, analyst at Birinyi, wrote in a note to clients dated yesterday. “While the vast majority of stocks are acting as one group, there are still many examples of the so-called ‘home-run,’ and finding one or two of them will generate significant performance for your portfolio.”

Cummins is 83 percent correlated with the Russell 3000, the highest within the group selected by Birinyi. The Columbus, Indiana-based maker of diesel truck engines and generators outperformed the equity gauge by 94 percentage points in 2010, according to the firm’s data.

VMware, the business-software maker based in Palo Alto, Calif., has a 64 percent correlation and has beaten the Russell 3000 by 97 percentage points. Chipotle, the Denver-based Mexican restaurant chain, has a 67 percent correlation and has outperformed the Russell 3000 by 92 percentage points.

     The following are the Russell 3000 Index companies selected
by Birinyi Associates Inc. which outperformed the gauge:

Company                       Correlation         YTD vs Index
Akamai Technologies Inc.          22%                 95%
AnnTaylor Stores Corp.            63%                 45%
Sotheby’s                         68%                 60%
Chipotle Mexican Grill Inc.       67%                 92%
Cummins Inc.                      83%                 94% Inc.               47%                 48%
Coinstar Inc.                     42%                 51%
Family Dollar Stores Inc.         29%                 55%
F5 Networks Inc.                  63%                 93%
Lexmark International Inc.        69%                 68% Inc.                41%                 56%
Under Armour Inc.                 75%                 62%
United Continental Holdings Inc.  56%                 80%
VMware Inc.                       64%                 97%
Wynn Resorts Ltd.                 82%                 46%

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