Unless you're a complete investing novice, you probably know these words by heart: Past performance is no guarantee of future results. Usually, you'll see experts apply that wisdom to urge you that yesterday's winners can just as quickly turn into tomorrow's losers.
But just accepting that platitude on face value is no better than counting on strong performance to continue forever. Given how easy it is to test that theory, you owe it to yourself to take a more scientific approach. So with that in mind, let's look at some of last year's top performers and see whether they've hurt latecomer investors or continued their winning ways.
The best of the Fortune 500
Last year, Fortune magazine took a look at the best-performing stocks in its namesake Fortune 500 list of companies. Fortune identified 10 companies whose shareholders saw spectacular gains during 2010. They included the following:
- Airlines United Continental
(NYSE: UAL) - Retailer Dillard's.
- Media companies CC Media and Liberty Capital.
- Manufacturers TRW Automotive
(NYSE: TRW) (NYSE: TEN) (NYSE: CMI) - Energy company Western Refining
(NYSE: WNR) - Casino giant Las Vegas Sands
(NYSE: LVS)
As you can imagine, these companies excelled for a variety of reasons. Though retail was in the dumps, Dillard's stock did well simply because of the company's survival. Similarly, airline stocks recovered from tough times thanks to strategic moves and higher fee revenue. With the auto industry recovering, parts makers like TRW and Tenneco shared in their success, while Western Refining benefited from higher gasoline prices. And media companies benefited from the resurgence in advertising interest as well as strength in their holdings.
Meanwhile, global expansion helped a number of these companies. Cummins gets a big piece of its business from Brazil, India, and China, and Las Vegas Sands counts its Macau casino as one of its biggest growth centers.
So did those trends continue in 2011? Let's take a quick look.
Winners and losers
Momentum investors believe that top-performing stocks tend to keep performing well. But among the 10 stocks, just three have moved decisively upward so far this year. Dillard's has seen almost euphoric responses from investors as earnings per share have almost doubled in the past year. Liberty Capital has tracked upward along with Sirius XM
Meanwhile, value investors would say that big winners have a big risk of falling back to earth. That's what airline stocks United Continental and US Airways have done this year, with shareholders concerned that high oil prices and insider selling will kill the optimism in the industry. CC Media has also lost more than 10% of its value.
But overall, the biggest group of these stocks simply hasn't moved much. TRW, Cummins, Tenneco, and Las Vegas Sands are all within 10% of their value at the beginning of the year. Las Vegas Sands, for instance, has missed out on its competitors' big share gains this year, but that may just make the casino stock a good value compared with its peers. Moreover, after double-digit gains in 2009 and 2010, the overall stock market has taken a breather, and so it's only natural for many of the stocks that make up big broad-market indexes to pause as well.
Don't fall for gimmicks
It's nice to think that there's a simple recipe to picking winning stocks. But past performance really doesn't guarantee future success -- or failure. Rather than simply buying the stocks on last year's top 10 list, doing a little work to see if business conditions support or are working against a particular company will give you insight into whether a stock's gains will continue.
The Fool is constantly doing that work. Our free report "5 Stocks The Motley Fool Owns -- And You Should, Too" includes some great stock ideas for you to consider. With both past winners and bargain-priced comeback stories, you'll find a wide variety of promising choices.
