Are These the Best Stocks for the Second Half?

For most investors, crossing from the first half of 2010 to the second half was a welcome event. While the S&P 500's 7.5% drop in the first six months of the year wasn't devastating, it did a lot to take the wind out of investors' sails after the strong showing last year.

But while the overall market's decline wasn't too steep in the first half, a handful of stocks fared far worse. The five stocks below were the S&P's worst performers for the first six months of 2010.

Source: Capital IQ, a Standard & Poor's company.

Time for a furious rebound?
If you believe that what goes down must come back up, then you might be tempted to jump on these beaten-down S&P constituents and bank on a big rebound in the back half of the year. Unfortunately, though there's certainly the possibility of a second-half comeback, history suggests that these may not be your best investments.

Here's a look at how the S&P's worst first-half performers fared in the second half of the year during the past two years.

Source: Capital IQ, a Standard & Poor's company.

Some of these stocks attacked the second half of the year with a vengeance and absolutely crushed the market. Gannett, for instance, more than quadrupled in the second six months of 2009, leaving the S&P and its measly 21% gain in the dust.

However, if we consider the relative performance of the first-half underperformers versus the S&P, we can see that of the 10 listed above, only five beat the index in the second half of the year. So your chances of picking an outperformer among first-half dogs was basically a coin flip.

Back away from the coin, Fool!
We're going to put the coins away since most Foolish investors wouldn't have much use for the data above. Not only is six months a short -- and relatively arbitrary -- length of time to measure the success or failure of an investment, but a stock's performance by itself is of little use to fundamentals-oriented investors. Instead, investors should be focusing on the prospects for those companies' businesses and the valuation on their stocks.

With that in mind, let's take another look at the S&P's first-half laggards.

Source: Capital IQ, a Standard & Poor's company, and Yahoo! Finance.
NM = not meaningful.

This additional data gives us more color on the situation and could highlight where good investment opportunities might lie. However, the slump-producing conditions for each of these companies are slightly different and they'll have to overcome their respective roadblocks if they want to see their stocks reverse course.

For steelmaker AK Steel, the issue is an economic one. When the global economy is clicking along, there is a need for steel in a wide variety of areas -- from autos to appliances to construction projects. But with economic uncertainty putting a damper on all sorts of activities, expectations for steel producers have gone cold. This is hardly specific to AK Steel, though. The performance of steel kingpin ArcelorMittal practically mirrors that of AK.

Anadarko has a very large, very high-profile event dragging its stock to the depths. Have you heard anything about BP's (NYSE: BP) mess in the Gulf of Mexico? Well, in case you haven't followed too closely, Anadarko owns 25% of that oil well-cum-disaster and so theoretically it's on the hook for 25% of the cost.

For investors, the math on Anadarko is simple. If it can safely digest its share of the costs or wriggle out of its responsibility to pay them, there will be nice gains ahead for investors. If it can't do either, there will be more pain on the horizon.

Monsanto and NVIDIA both have company-specific issues that they need to hammer out to get their respective stocks moving in the right direction. NVIDIA has been struggling with its new line of graphics cards and has put competitors like AMD (NYSE: AMD) in a position to be more of a threat. Monsanto, meanwhile, has watched its herbicide business get slaughtered by generic competition and now has to prove to investors that its seed business can pick up the slack.

And finally, Dean Foods is facing a host of problems, including an antitrust lawsuit from the Department of Justice, even as contracting margins contributed to a 23% drop in earnings per share over the past year. With all of that going on, it'd be hard for investors not to be uneasy about the company's hefty debt load.

Picking a winner
So which of these stocks are going to outpace the market over the next six months? I'd still defer to the coin on that one. Over the longer term, though, I wouldn't want to bet against Dean Foods or Monsanto. Both are solid, cash-producing businesses that serve the always important food market.

But I want to know what you think. Will the S&P's first-half laggards become second-half champs? Head down to the comments section and share your thoughts.

The S&P 500 only covers U.S. companies, so we'll have to ditch that index if we want to find great stocks in countries like China.