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 of many hot stock pickers in 2007 was size, with most media publications favoring large caps. For instance, SmartMoney foresaw dark economic clouds on the horizon and eliminated any stock below $10 billion from its 12 Picks for 2007. This kept the magazine out of more risky small caps, and anchored its portfolio in giants like Goldman Sachs (NYSE: GS ) and Anheuser-Busch (NYSE: BUD ) .
Kiplinger's Personal Finance editor Jeffrey Kosnett also opted mostly for large-cap bellwethers such as Johnson & Johnson (NYSE: JNJ ) , which returned 4% last year. Kosnett did have two large-cap picks return more than 50%, though -- Textron and Arch Coal (NYSE: ACI ) which delivered 54% and 51%, respectively, in 2007.
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, too, because the average pick on each list handily outpaced the S&P. Of course, not all the stocks were winners, though -- for instance, SmartMoney pick Lehman Brothers (NYSE: LEH ) dropped 15% last year and is down a staggering 75% already in 2008.
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 area was notably absent in many of the 2007 stock pick lists -- international stocks. While some lists contained large caps with a strong international presence, SmartMoney was one of the few that directly recommended international stars China Mobile and Coca-Cola Hellenic Bottling. Stock in these international darlings rose 105% and 64%, 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 ETF, which benefited from a heavy position in Apple, returned 19%, while the iShares MSCI Emerging Markets (NYSE: EEM ) exchange-traded fund almost lapped this performance with a 33% return.
The year 2007 was not a story of what was hot, but where was hot.
With the first half of 2008 now history, many international companies have seen significant cuts in value along with the broader market. With the recent declines, some investors think China still presents one of the biggest economic opportunities this century. But other, less-known emerging markets such as Malaysia and South Africa present great opportunities as well.
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. And many of those that aren't directly pitching foreign shares recommend U.S. stocks that earn substantial income from abroad, such as McDonald's (NYSE: MCD ) and General Electric. But chasing yesterday's hot foreign plays can land you in the poorhouse.
And though shares of many foreign companies have been volatile lately, the long-term future is bright for many undervalued international stocks. They simply require a little extra legwork to find, and some extra caution about valuations and country risks (politics, currency, etc.).
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This article was first published as "Hot Stocks For 2008" on 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 shares of Johnson & Johnson, an Income Investor pick. Apple is a Stock Advisor recommendation. The Motley Fool's disclosure policy keeps its 1970s playlist first in the queue.