Past performance is famously no guarantee of future results, but as a contrarian indicator, it can come in mighty handy. The market really does move in cycles, after all, taking your portfolio along for the ride. The upshot: Because one cycle's overachievers can be the next cycle's laggards, savvy investors should strive to zig when others zag.
That said, contrarian investing can be a contact sport, with market trends persisting well past the point at which you'd expect them to evaporate on contact with valuation reality. Consider the late-'90s tech bubble, for instance. Now consider the Foolish wisdom of mutual funds. When chosen intelligently, funds can reduce your portfolio's volatility and allow you to take advantage of Wall Street's "nearsightedness."
A nice investing twofer, no?
Don't
follow the leader
With that as a backdrop, one smart way to proceed these days is to favor funds that traffic in discounted big boys such as Amgen (Nasdaq: AMGN), Motorola (NYSE: MOT), and Countrywide Financial -- companies whose stock prices are currently more than 20% below their respective 52-week highs.
To be sure, smaller fish such as Urban Outfitters (Nasdaq: URBN) and American Eagle Outfitters (NYSE: AEO) -- and therefore the kinds of funds that favor them -- have put up big numbers over the last three- and five-year trailing periods. I'd argue, though, that even in light of the recent pullback, they're still pretty much priced for perfection. At the very least, they have much more at stake when earnings-growth forecasts are missed or when a hotly anticipated "catalyst" fails to materialize.
Meanwhile, after lagging smaller stocks for years, large caps are showing signs of life; they currently represent the market's valuation sweet spot. Growth-oriented large caps seem especially attractive right now. Investors have bid them down (on a relative basis) for so long that Mr. Market has basically morphed into Crazy Eddie where they're concerned: Prices are so low, they're insane!
OK, maybe "insane" is overstating it. Still, FedEx (NYSE: FDX) for example, currently trades at a P/E discount relative to both its typical peer and its own five-year average. That's also true of Best Buy (NYSE: BBY), even though, for the 10 years that ended with February, the consumer electronics retailer's returns (like those of FedEx) surpass both its industry average and the S&P 500.
Pesky volatility
Make no mistake: There's no timing a market's "turn." That's another reason why smart contrarians should give funds their careful consideration: The built-in diversification they provide can smooth the speed bumps on the path to retirement bliss.
That said, with more than 7,000 of the suckers vying for your hard-earned moola -- and with the vast majority of 'em market-lagging time-wasters -- it pays to be choosy. You can always go the indexing route, of course, but remember: With index funds, the most you can realistically expect is that your funds will lag their benchmarks by about the amount of their price tags.
A Fool's final word
Enter Champion Funds, the Foolish investing service dedicated to beating the market with funds. Since opening for business back in March 2004, my list of recommendations has bested the market by roughly 13 percentage points. These picks hail from all corners of the market, too -- large-cap growth included. Indeed, we've identified five choice large-cap growth funds that smart contrarians should consider for this year and beyond.
You can sneak a peek at those funds, and all the others we've tapped, by clicking here for a free guest pass. You'll have 30 days to browse our current issue and archives, as well as our members-only discussion boards, complete recommendations list, and model portfolios. There's no obligation to stick around if you find it's not for you.
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This article was originally published as "The Best Investments for 2007" on Nov. 28, 2006. It has been updated.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light. At the time of publication, he didn't own any of the securities mentioned above. American Eagle, FedEx, and Best Buy are Motley Fool Stock Advisor recommendations. You can check out the Fool's strict disclosure policy by clicking right here.
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