A month into 2012, things look pretty good for the stock market. But just because January's been kind to stocks, that doesn't mean that the rest of the year will automatically turn out well. To make sure you're in the best position to profit from good performance, you still need to separate the best from the rest and focus your efforts on your best ideas.
So how do you find the stocks with the best prospects going forward? Today, I'd like to use two themes that can help you uncover interesting stocks wherever you look, as I turn to both the best-performing and worst-performing stocks among the Dow Jones Industrials
Mixing momentum and value
I'm a big believer that it takes more than one investing philosophy to be the best investor you can be. Momentum-growth investors score some huge gains, but they can also watch their profits evaporate when they hold on too long without paying any attention to valuation. Conversely, value investors miss out on some of the best growth opportunities in the market, as well as falling prey to value traps that can cause huge losses. Let's take each of those philosophies in turn.
Who has the momentum?
Among the Dow's 22 winners so far this year, Bank of America, Caterpillar
Of those four, B of A and Alcoa have challenges. Despite B of A's having taken a huge hit during both the financial crisis in 2008-09 as well as more recently, it's hard to feel all that comfortable about the stock going forward. With the bank having taken some extreme measures to boost its capital, B of A isn't radiating confidence. It could easily be a multibagger in a recovery -- but it also has plenty of risk. Meanwhile, Alcoa faces depressed aluminum prices that have forced it to cut production, and things don't look like they'll turn around anytime soon.
But I think Caterpillar and Microsoft could continue to advance. Caterpillar is tapped into emerging-market growth, and with metals prices at high levels, the demand for mining equipment that Caterpillar provides is particularly strong -- and could continue growing over time. On the other hand, expectations for Microsoft have been uniformly low in recent years. But with Windows 8 coming, as well as Windows Phone Mango and cloud plays Azure and Office365, Microsoft isn't ceding the mobile market to competitors -- and despite rampant pessimism, the software giant should be able to take its dominant position and extend it into the rapidly growing mobile area.
Can these stocks rebound?
On the other side of the coin, among the Dow's eight losing stocks, you'll find Verizon, Procter & Gamble
Verizon faces some big issues that will be hard to overcome. Even as the mobile market grows at staggering rates, large subsidies hurt the margins at the carriers that provide phones. While 4G LTE service may eventually pay off for the company, until a 4G iPhone comes out, the network won't move the needle. Chevron also disappointed investors with its earnings report, as its downstream segment struggled. Those problems have led competitors to spin off their downstream operations, but so far, Chevron hasn't said it would follow suit.
But Coke and P&G could easily reverse course and turn higher. P&G saw a big drop in its quarterly profit, but a lot of it came from a one-time goodwill writedown. Such isolated hits can often create nice bargains for patient investors willing to wait for them, and with the strength of P&G's wildly popular brands, I don't see even Europe's woes holding the company down for long. With continued strength in emerging markets, P&G looks like a good long-term play. Similarly, Coca-Cola has already demonstrated its growth potential in global markets. With headline events like the Olympics coming this year, it will once again have the opportunity to demonstrate its brand domination across the globe.
4 for February
As I see it, these stocks have what it takes to post solid returns in February. But don't worry too much about one month's worth of results. Whether it's momentum, value, or a combination of both driving them, these four companies would make good plays for long-term investors as well.
If you're willing to go beyond the Dow, you can find plenty of great opportunities for huge gains over the long haul. Just turn to The Motley Fool's latest special report to discover the names of three great prospects. The report is absolutely free, but it won't be around forever, so read it today.