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My Top 2 George Soros Picks

For more than 40 years, George Soros delivered an average annual return of about 20% to the investors in his hedge fund. At that rate of return, a $10,000 investment when the fund was started in 1969 would have grown to more than $20 million when Soros closed the fund in 2011.

Soros did not provide day-to-day management for the fund throughout its entire history, but he was the driving force behind those gains.

He may be best known for his success in the currency markets. Soros is the trader who broke the Bank of England and enjoyed a $1 billion profit in a single day. But Soros started his career as a stock market analyst and demonstrated his extraordinary talent for investing in his 1987 book The Alchemy of Finance. His stock selection was responsible for most of the returns in his hedge fund. His fund more than doubled in about a year while he was documenting his thoughts about the markets.

The Alchemy of Finance also includes a detailed discussion of Soros' investment philosophy. Soros wrote, "Most of what I know is in the book... I have not kept anything deliberately hidden." Soros also acknowledges that he has written "a difficult, dense book." It requires study to understand but is well worth the effort.

His theory of reflexivity is interesting, but investors can benefit from this theory even if they find it difficult to understand. As a large investor, Soros is required to disclose his holdings at least once every three months. It takes time for an investor with billions of dollars under management to make significant moves, so portfolio changes are a clue to Soros' thinking. From his most recent filing, which reveals what Soros was holding at the end of June, we can spot broad trends in his trading.

Soros holds a large number of stocks, more than 220 at the end of June. He also uses call options to gain exposure to companies without tying up a large amount of capital. However, his portfolio is not as diversified as it sounds. For example, he seems to like the cable television industry and owns at least six different stocks in that sector.

As individual investors, we cannot hold 200 or more stocks. To overcome this problem while still benefiting from Soros' stock-picking expertise, I developed a system that identifies stocks with high relative strength (RS) and strong cash flow growth. These two factors have been proven to be cornerstones of successful investment strategies.

Using this system to find the strongest stocks in Soros' portfolio right now, two buys are Lions Gate Entertainment Corp. (NYSE: LGF) and LinkedIn Corp. (NYSE: LNKD).

Lions Gate Entertainment is a movie producer whose hits include the Twilight and Hunger Games franchises. LGF has grown its free cash flow by an average of more than 20% a year over the past five years. The stock has gained more than 130% since the beginning of the year and has an RS rank of 95, indicating that it has outperformed 95% of stocks in the past six months.

LinkedIn is a social media site for professionals with more than 225 million users. LNKD generates revenue from corporate recruiters who access the resumes of members, advertisers and premium users.

The company reported revenue of more than $1.2 billion in the past 12 months. LNKD has been profitable since 2010, and analysts expect the company to see earnings growth averaging 60% a year over the next five years. Free cash flow growth has averaged 100% a year for the past three years.

Since going public in 2011, LNKD has gained almost 150%, with most of that gain coming since the beginning of this year. LNKD is up nearly 120% in 2013. With an RS rank of 91, LNKD has outperformed 91% of the market in the past six months.

LGF and LNKD have been market leaders for the past six months, and have been rated as buys by one of the best investors in the world.

My latest research shows that following market gurus like Soros is one of the best ways to make money in the stock market. And Soros is just one of the 20 investing gurus I follow.

But it's not as simple as looking at their portfolio and buying what they hold. Timing matters.

I've come out with a new free report that helps you understand exactly how you can beat the best gurus in the country at their own game. To get access to the free report, "How to Outperform Soros, Icahn... or Even Buffett," click here.