Will 2009's Hottest Stocks Be 2010's?

I set out to find the hottest stocks in the market right now.

I looked for the top performer in each sector, with only these restrictions: The company had to have a market cap of at least $200 million at the beginning of the year and sell on a major U.S. stock exchange.

You may be surprised that the piping-hot shares of Sirius XM Radio (Nasdaq: SIRI  ) and Ford (NYSE: F  ) weren't hot enough to make the list. Without further ado:

Industry

Company

YTD Return

Energy

Berry Petroleum

256%

Materials

Teck Resources (NYSE: TCK  )

603%

Industrials

Trina Solar

415%

Consumer discretionary

TRW Automotive

565%

Consumer staples

Rite Aid

307%

Health care

Human Genome Sciences (Nasdaq: HGSI  )

1,179%

Financials

XL Capital

391%

Information technology

RF Micro Devices (Nasdaq: RFMD  )

547%

Telecommunications services

Abovenet

301%

Utilities

AES

55%

Average

 

462%

S&P 500

 

24%

Sources: Capital IQ (a division of Standard and Poor's) and Yahoo! Finance.

Those are some blistering returns, to be sure. But they won't help us today -- unless their runs continue. The question remains: Will 2009's hottest stocks be 2010's?

Let's take a quick step back to see what happened with last year's winners.

Industry

Company

2008 Return

2009 YTD Return

Energy

Vaalco Energy

60%

(43%)

Materials

Eldorado Gold

66%

43%

Industrials

Beacon Roofing Supply

65%

16%

Consumer discretionary

Fuel Systems Solutions

129%

54%

Consumer staples

Prestige Brands

41%

(29%)

Health care

Sequenom

108%

(77%)

Financials

Crawford & Co.

250%

(75%)

Information technology

NCI

76%

(17%)

Telecommunications services

Shenandoah Telecommunications

18%

(32%)

Utilities

Laclede Group

41%

(25%)

Average

 

85%

(19%)

S&P 500

 

(37%)

24%

Sources: Capital IQ (a division of Standard and Poor's) and Yahoo! Finance.

All right, that's a lot of data to look at. Let's summarize it into three quick bullets:

  • None of 2008's big winners made 2009's list.
  • As a group, they got trounced by the market.
  • Only two of 10 beat the market; seven had negative returns.

I don't show you this data to try to extract any speculative rules from one year's worth of data. It's just a reminder that momentum eventually breaks. Jumping into the hottest thing around frequently looks good for a while. Until it doesn't.

The housing bubble taught us that on a grand scale.

The exception
There's a problem with ignoring 2009's hottest stocks, though. Sometimes a hot stock is an amazing growth stock story. And sometimes an amazing growth stock story looks just like a bubble.

Here's a quick example from recent history: A stock IPO's and shares increase by 300% in less than two years ... despite a huge post-IPO market crash. If you refused to get in, you would have been somewhat vindicated the next year. The stock fell 3%. Then it went up another 500% in the following three-year period!

That was the Microsoft (Nasdaq: MSFT  ) story from 1986 to 1991, well before its bubble-assisted growth in the late '90s.

And another exception
It can also be easy to ignore growth stocks because they frequently look expensive using measures like P/E ratios -- especially after big runs.

As their name suggests, growth stocks require years of high growth to justify those lofty valuations. When Motley Fool co-founder David Gardner recommended Intuitive Surgical (Nasdaq: ISRG  ) in his Rule Breakers newsletter back in 2005, it had a P/E ratio of 71. However, its earnings have grown by so much that its P/E ratio is now lower after a 500% share price increase. Nice.

That's not always the case. More often than not, a stock with a P/E ratio of 71 is just plain overvalued.

Given that many of the hottest stocks I identified above have expensive P/E ratios, how do we tell the difference between an overvalued, bubblicious stock and a stock like Microsoft in 1986 or Intuitive Surgical in 2005?

I went back to David Gardner -- the guy who named his newsletter "Rule Breakers" -- for the answer. The stocks he's willing to pay up for are the ones that are "truly disruptive in their industries." In other words, they break the rules that their competitors cling to.

We all know how Microsoft disrupted the computer industry. Intuitive Surgical's business is replacing human surgeons with robots. I'd call that pretty darn disruptive as well.

Finding the true disrupters
Keep these examples of true disrupters in mind as you try to determine whether the hot stocks of this year will be the hot stocks of next year and beyond. Those that are priced for growth need to back it up with true rule breaking.

At this point you're probably wondering whether any of 2009's hottest stocks are on David's list of true disrupters. The answer is no. Not yet, at least.

If they ever do make the cut for his Rule Breakers newsletter, though, note that the type of investing David does is not for the faint of heart. He's not going after bunts and singles. He's swinging for the fences. That means he makes his share of strikeouts. His philosophy is that the home runs more than make up for the strikeouts.

That's been the case so far. Since he started Rule Breakers in 2004, he's beaten the market by 19 percentage points. If you'd like to join him in stalking the long ball (and see all his recommendations), click here for a 30-day free trial.

Anand Chokkavelu owns shares of Intuitive Surgical, Sirius XM Radio, and Microsoft. Intuitive Surgical is a Motley Fool Rule Breakers pick. Microsoft is an Inside Value recommendation. Motley Fool Options has recommended a diagonal call on Microsoft. The Fool has a disclosure policy.


Read/Post Comments (17) | Recommend This Article (51)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 10, 2009, at 12:17 PM, pondee619 wrote:

    So, what is the only thing to learned from this "article"?

    "click here for a 30-day free trial"

    "I set out to find the hottest stocks in the market right now" Why?

    "None of 2008's big winners made 2009's list."

    "As a group, they (2008's big winners) got trounced by the market."

    "I set out to find the hottest stocks in the market right now" only to fill space with some writing before my sales pitch.

  • Report this Comment On December 10, 2009, at 3:57 PM, Fool wrote:

    Don't forget to put the SIRI symbol in the article toale sure you get lots of hits!

  • Report this Comment On December 10, 2009, at 5:51 PM, Bonefish100 wrote:

    pondee619 hit it on the head. TMF is mostly a bait-and-swith subscription operation.

  • Report this Comment On December 10, 2009, at 7:38 PM, Ronabc wrote:

    Looks like TMF has a major marketing problem...

  • Report this Comment On December 11, 2009, at 5:15 AM, AnnefromBelgium wrote:

    Looks like some of YOU guys have a major marketing problem. Putting your precious time reading free articles from a company you don't like! What a waste of time ;-).

    Darlings, the Motley Fool is not perfect but has to operate in a highly competitive market. Can you expect them to give away everything for free? No. And I can assure you that what they (The Brothers) are doing and HOW is pretty unique in this landscape.

    I have a few paid subscriptions + I still read the dailies. and yes, there are a lot of little articles that are the 'bait' but I still read them as I find some precious info in each and every one of them. In this case that there is no consistency in the ‘winners’ from one year to another. Plus - most important - it gives me an insight in the different styles of investing one may choose. So it IS worth the time...

    Anne

  • Report this Comment On December 11, 2009, at 6:50 AM, trimanjerry wrote:

    Excuse me, I paid to join Motley Fool and receive the emails......only to mainly read marketing dribble for more money......Motley Fool will soon be in my spam filter

  • Report this Comment On December 11, 2009, at 12:22 PM, jmbring wrote:

    right on, Anne.

    instead of complaining about not getting 2010's hottest stocks for free, how about we use this 'site to discuss what we think they'll be?

    of course TMF is not perfect...but they've created and support a large and diverse community that we all profit from without paying a cent. something to think about the next time you use CAPS...

    Mark

  • Report this Comment On December 11, 2009, at 12:27 PM, wuff3t wrote:

    AnnefromBelgium - you're wasting your time. A couple of these guys turn up on an almost daily basis and post pretty much exactly the same thing every time. It wouldn't matter if TMF offered a perfect service, they still wouldn't be happy. But you're right - it is odd that they dislike the service so much and yet feel inclined to spend their time returning...

  • Report this Comment On December 11, 2009, at 5:37 PM, colddrink73 wrote:

    Hey I just wanted to say I love the service I enjoy the competition on CAPS and I subscribe to Stock Advisor.

  • Report this Comment On December 11, 2009, at 10:30 PM, fullmoonchaser wrote:

    I'm with AnnefromBelgium on this. The only cost I've had on this site is my time, and I have picked up a few ideas... Also the CAPS part is great for research on historical prices and financials.

    I suppose the complainers also don't think that their daily paper should have ads in it if they pay for their subscriptions. Sheeesh!!!

  • Report this Comment On December 11, 2009, at 11:21 PM, 8Lives wrote:

    Right on! --to the comments that support what the Fool does.

  • Report this Comment On December 12, 2009, at 3:25 PM, Aim4the5Hole wrote:

    The writer of this article Anand Chokkavelu,

    has given you the names of the three stock's in this article.

    Do you need them to flash red, so you can find them? Furthermore, quite your whining about the articles, that they are all are sales advertisements for other services.

    The Motley Fool web site is a business, whose goal is to make money, and give you some advice.

    You the reader, needs to do some further research on your own, before investing in the companies recomended, and to stop acting like a bunch of chimp's flinging their waste!

    If you are to lazy, then pay a hefty fee to a professional stock broker for their advice.

  • Report this Comment On December 15, 2009, at 11:58 AM, pondee619 wrote:

    Okay. Only one fool supporter answered my question, what did we learn from the above article. Anne learned that there is no consistency from last years winners to this years. Anything else? Aim says there are three stocks named in the article. I counted four outside of the tables. Not one recommedation is made on any of them. Sirius and Ford weren't hot enough to get a mention. Microsoft's mention is a history lesson and we should have bought ISRG in 2005.

    Fortunately it take little time to read these "articles". Same's the pity. if you are satisfied with the fools writting, ignore my comments. i think the fool can do better, I expect it. I'll demand it. Should you wish to accept substandard pap, so be it. That is as much your right as mine to demand better.

  • Report this Comment On December 16, 2009, at 10:26 AM, pondee619 wrote:

    "don't think that their daily paper should have ads "

    Dear fullmoonchaser:

    I would scream just as loudly if newspapers placed their ads in their "news" articles or editorials. I think you would also.

    I'm also not complaning about the ads, per se, I just believe that the fool is capable of providing a better product to it's loyal readers. I may be wrong on this, but hope springs eternal.

  • Report this Comment On December 17, 2009, at 7:14 PM, conrod10 wrote:

    IAGREE WITH MANY OTHERS, I PAYED TO GET HELP AND SUGGESTIONS IN BUYING STOCKS. YOU ARE MAKING MONEY BY ALL OF US THAT HAVE JOINED. GIVE US SOME THING FOR OUR MONEY.

    RODY

  • Report this Comment On December 18, 2009, at 3:44 PM, ilangovan wrote:

    Fool has been really fooling us all!

    It was good at the beginning.

    But now they want to make more and more and taking us all for a ride,

    No more good recommendation any more.

    Just sales pitch and make them rich.

  • Report this Comment On January 02, 2010, at 6:01 AM, astralexis wrote:

    I'm with pondee619.

    The Fool's articles are like advertisements for Mike Geary's book "The Truth about six pack abs":

    "In this article we will tell you everything you need to know to get them perfect six pack abs. But before we get into the subject, let us ask: why would you even want six pack abs? [...] So, you do want six packs. The good news is that it's definitely possible to get them, let's take a look at some past examples: [...]. At this point you probably wonder what you should do to get these results. For this, let me introduce you to my friend Mike Geary. He's a genius and he knows all the secrets! And here's the good news: Mike has written a book..."

    In The Fool's case, the six packs are money, the genius is David Gardner and the book is a newsletter, otherwise it's the same.

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