Last year, I looked at what some stock experts had predicted to be the prior year's profitable trends. It turned out that many of the popular "hot stocks" flamed out, while numerous no-names came through with above-average gains.
While hindsight showed that the hot and the chic are often overvalued thanks to speculation, a review of last year's hot stock lists teaches a different lesson.
Safety in size
The theme for many of the hot stock lists in 2007 was size, with most media publications favoring large caps. Seeing economic clouds on the horizon, SmartMoney eliminated any stock below $10 billion from its 12 Picks for 2007, figuring large caps would weather what it expected to be a choppy economy. This kept the magazine out of more risky small caps, though it did peg two volatile Internet stocks, Yahoo! (Nasdaq: YHOO) and Amazon.com (Nasdaq: AMZN).
Kiplinger's Personal Finance editor Jeffrey Kosnett opted mostly for large-cap bellwethers as well, picking giants such as AT&T (NYSE: T), which returned 23% last year. Also, two of Kosnett's large-cap picks returned more than 50% -- Textron and Arch Coal.
So, just as Paris is eschewing models with little meat on their bones, big was back in fashion for stocks in 2007. The average market cap for the SmartMoney picks was a whopping $62 billion. The results show that the decision to go big was a good call, because the average pick on each list handily outpaced the S&P. Of course, not every large stock pick was a big winner -- for instance, Kiplinger's pick Cisco Systems (Nasdaq: CSCO) managed only a 2% return last year.
What was hot yesterday ...
So does that mean large caps are chic again? That they're the sector of choice for 2008? Not exactly.
One en fuego sector was notably absent in many of the 2007 stock pick lists -- international stocks. While many lists contained large caps with a strong international presence, SmartMoney was one of the few that directly recommended international giants China Mobile (NYSE: CHL) and Coca-Cola Hellenic Bottling. Stock in these international darlings rose 92% and 68%, respectively, in 2007.
So while selected U.S.-based large caps offered great performance, emerging-market companies generated even more growth. Consider that last year, the PowerShares QQQ (Nasdaq: QQQQ) ETF, which benefited from a heavy position in Apple (Nasdaq: AAPL), returned 18.8%, while the iShares MSCI Emerging Markets exchange-traded fund almost lapped this performance with a 32.2% return.
The year 2007 was not a story of what was hot, but where was hot.
The Foolish bottom line
Because many investors tend to chase the hot trends from last year, the 2008 hot stock lists show -- you guessed it -- a larger smattering of international stocks. But chasing yesterday's hot foreign plays can land you in the poorhouse.
Though the prices of some international stocks have soared beyond the level of attractive investments, there are still plenty of untapped markets and undervalued international stocks. They simply require a little extra legwork to find, and some extra caution about valuations and country risks (politics, currency, etc.).
Our Motley Fool Global Gains service has been doing the heavy lifting by scouring the globe looking for great opportunities. If you need a few ideas and want to see what companies are tantalizing the team on their current trip in Asia, just click here to see all the research and recommendations free for 30 days.
This article was first published Dec. 21, 2007. It has been updated.
Fool contributor Dave Mock frequently blasts to the past with his favorite '80s band, Neon Nation. He owns no shares of companies mentioned here. Amazon.com and Apple are Stock Advisor recommendations The Motley Fool's disclosure policy keeps its 1970s playlist first in the queue.
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