Learn From Last Quarter's Winners

Too many investors focus solely on quarterly results. But even though three months is far too short a time by itself to judge the future of a particular company or sector, it can still be useful to look back at the end of a quarter to see which direction various stocks have gone and to place their moves in the context of their longer-term performance.

With that in mind, let's take a look at what worked and what didn't for investors during the third quarter. These recent results could give us some clues about what may work during the coming quarter and beyond.

Two types of winners
With a 6% rise in the third quarter, the S&P 500 didn't have any shortage of winning stocks. What's interesting, though, is that with one big exception, the third quarter's winners came from the same sectors that have been producing success stories all year long.

Technology and telecom stocks continued their broad advance with roughly 7% gains. One of the biggest gainers was Google, which soared about 30% during the quarter. The company has benefited greatly from missteps by Apple (Nasdaq: AAPL  ) in choosing not to offer Google's mapping software, going instead with its own problem-filled maps instead. Yet what could bring Google the status of the world's first trillion-dollar company is the potential in mobile advertising. Neither Google nor Facebook (Nasdaq: FB  ) has mastered mobile yet, but whichever company gets there first could see huge gains that would make past performance look trivial by comparison.

Meanwhile, consumer discretionary and financial stocks have also kept rising. Rising consumer confidence has continued to boost Amazon.com stock, while a rebounding housing market pushed Home Depot (NYSE: HD  ) higher by almost 15% for the quarter. For Home Depot, improving conditions are just icing on the cake, as the company has managed to hold its own even in a terrible housing environment. On the financial side, banks continue to deal with systemic risks in Europe, but efforts to lessen stresses on the global financial system, as well as coordinated central-bank intervention to support growth, have made bank investors feel a lot more confident. Citigroup, for instance, soared almost 20% for the quarter on the renewed optimism.

But one successful sector actually reversed course and bounced back from losses earlier in the year. Energy stocks were the biggest gainers for the quarter, with the sector jumping almost 10%. That's particularly surprising in light of oil prices having fallen recently to the $90 level, but refining companies in the U.S. have taken advantage of lower prices for West Texas Intermediate compared to Brent crude to benefit from wide spreads for refined energy products like gasoline and diesel. Similarly, Bakken producer Kodiak Oil & Gas (NYSE: KOG  ) has seen demand rise for its oil production, boosting profits and helping to affirm the rising importance of domestic energy resources as a counterbalance against geopolitical risk.

Who's losing
On the downside once again was the utility sector, falling nearly 2% to bring its year-to-date returns down to a single percentage point. Utilities tend to draw conservative investors who are more interested in preserving principal than in finding growth. Yet the character of many utility companies has changed, as their results are increasingly tied to levels of economic activity in their respective markets.

Despite high oil prices, natural gas has remained stubbornly low, hurting gas utilities. Meanwhile, most electric utilities have benefited from low costs, but that still hasn't helped their overall results. Moreover, as a producer of nuclear energy, Exelon (NYSE: EXC  ) remains down by nearly 15% for the year after another mild drop in the third quarter.

What's next?
As the year draws to a close, you'll often see winning stocks continue to rise while losing stocks fall prey to tax-loss selling and other momentum-based strategies. Trends don't last forever, but as long as the same conditions persist that created those trends in the first place, you should think twice before reversing course.

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Fool contributor Dan Caplinger likes things that work. You can follow him on Twitter @DanCaplinger. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Facebook, Apple, Citigroup, Google, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Google, Amazon.com, Exelon, Facebook, Home Depot, and Apple, as well as writing puts on Exelon and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy works well for you.


Read/Post Comments (3) | Recommend This Article (1)

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  • Report this Comment On October 01, 2012, at 12:33 PM, jdmeck wrote:

    "...going instead with its own problem-filled maps instead"

    And are you basing that on false and mis-leading news stories or actual experience? Apple maps is much better looking than Google. Go do a side by side comparison on your own.

  • Report this Comment On October 01, 2012, at 4:22 PM, TMFGalagan wrote:

    @jdmeck - Nope, I'm basing that on the fact on experience from a number of people, including my own personal experience with a road a mile from my home for which Apple believes a bridge that was taken down more than 10 years ago is still there.

    best,

    dan (TMF Galagan)

  • Report this Comment On October 15, 2012, at 2:58 PM, thidmark wrote:

    "Apple maps is much better looking than Google."

    This has nothing to do with whether the damn thing works.

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