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Do the Best Companies Always Win?

In this week's issue of Barron's, the magazine highlighted its 13th annual list of the Barron's 500.  In this year's list there were some major shakeups to the top ten as only one company in last year's top ten remained in the top ten this year.  Ironically enough, that one company was Research in Motion (RIMM) which also happens to be the stock in this year's top ten list that has had the worst performance (-30%) over the last year.

The question for investors reading this article is, do the most highly regarded companies always do the best?  The answer to this question is an emphatic no.  In the long run high quality tends to win out, but in the short run anything can happen.  A perfect example is the current bull market, where it is the lowest quality stocks that have led equity prices higher.  This is further illustrated by the performance of last year's (2010) top ten companies on the Barron's list.  On an equally weighted basis, the top ten rated stocks from last year's list actually underperformed the S&P 500 by 150 basis points (14.2% vs 15.7%).

Last year's top ten names included MO, GILD, SAI. GD, HRS, MDT, BIIB, RIMM, MA, LINTA.

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