Hot Stocks for 2007

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, AOL money analyst Hilary Kramer's best picks for 2006 included PetroChina, which yielded a 75% gain in 2006. She also picked small cap Compass Minerals, which returned 32%, well above the S&P return of nearly 16%. But also included in her list was popular search king Google -- up only 9% -- and Sirius Satellite Radio -- actually down 48%.

Zacks' Dirk van Dijk made good calls on Companhia Vale do Rio Doce and UBS, which returned 41% and 27%, respectively. But another selection, eBay, mirrored competing web destination Yahoo!'s (NASDAQ:YHOO) 35% plunge with its own 31% decline for the year.

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:

So, investments in companies as diverse as a steel wire manufacturer, a Canadian juice bottler, and a portly man's clothier can blow 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.

Like the stodgy, faceless lineman doing the dirty job of protecting the star quarterback on a football team, these companies deal with and often compete with their popular counterparts -- so they're not really all that invisible. But they often have more to gain from their obscurity. For instance, Insteel Industries shares little limelight with popular cement producer Cemex (NYSE:CX) or wallboard maker Eagle Materials (NYSE:EXP), but ongoing demand for building materials similarly boosts demand for Insteel's profitable niche of concrete reinforcement products.

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 -- small, 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, Cemex, and Yahoo! are Stock Advisor recommendations. Cemex is also a Global Gains recommendation. What's really hot is The Motley Fool's disclosure policy.