I always love the "What's Hot, What's Not" profiles that adorn the pop culture rags each year. I mean, what's more exciting than knowing Johnny Depp's bed-head hairdo is now chic and perfectly acceptable in public?
Many popular investing publications and analysts like to offer predictions for hot stocks and funds for the coming year as well. But unlike a swanky Angelina Jolie outfit, much of what's labeled "hot" in the stock world couldn't light a flame in a furnace.
In fact, many "hot stock" predictions turn out to be worse than average, or outright duds.
What was hot yesterday ...
Of course, nobody is perfect at picking stocks -- we all have our winners and plenty of losers. And picking stocks for performance within an arbitrary period of one year is hardly the best way to invest. Holding great companies for decades is a much better way to achieve market-beating returns. But can anything be learned from these yearly prognostications?
I think so. In reviewing what a few analysts picked for top stocks in 2006, some very interesting lessons come through. For instance, in addition to a solid recommendation in Liberty Media -- which restructured into two tracking stocks, Liberty Media Capital Group
Zacks' Dirk van Dijk trumped even a solid 22% showing from his pick in ConocoPhilips
Measure the madness
Overall, both analysts picked several solid performers. But take a look at which stocks beat the S&P. They weren't the high-growth tech darlings such as Google and eBay, which, given their consumer appeal and analyst coverage, should probably be considered among the hot and chic of the stock universe.
Rather, the hot returns often come from companies in otherwise boring or unknown industries -- like oil and gas exploration or rock salt. Why? Because the hot and chic are often valued above and beyond the rate at which they can grow. Thus, the disappointing returns.
Take it to the next level
Now consider some little-known stocks that didn't even make the hot lists:
|
Company |
2006 return |
|---|---|
|
Chaparral Steel |
193% |
|
Jones Soda |
130% |
|
Casual Male |
112% |
So, investors in companies as diverse as a steel manufacturer, a beverage manufacturer, and a portly-man's clothier blew away even the best of the popular hot stocks? If there was ever a real-world example of the high school nerd growing up to be Brad Pitt, this is it.
The Foolish bottom line
If you want to be really hot, what should you look for in 2007? For starters, look beyond the headliners -- these are usually stories buffeted by stock surges in the past, and some don't even have solid fundamentals to stand on. Then look for the few simple traits the best investments have in common -- undervalued and underappreciated cash-producing companies in drab industries that few investors follow.
If you're looking to shed yesterday's fashion and get hot in 2007, the Motley Fool Hidden Gems service can help you warm up. Lead analysts and fashion trendsetters Tom Gardner and Bill Mann wrote the book on massive returns from sleepy, boring companies. You can click here for a free 30-day trial to see their hot stocks for 2007, all dressed up and ready for the cameras.
This article was first published on March 12, 2007. It has been updated.
Fool contributor Dave Mock is so hot he looks forward to the return of Dolphin shorts, tube socks, and V-neck tees to go with his new bed-head hairstyle. And he's so hip he owns no shares of companies mentioned here. The longtime Fool is the author of The Qualcomm Equation. eBay is a Stock Advisor recommendation. What's really hot is The Motley Fool's disclosure policy.
