CHICAGO (Reuters) - It takes a lot of gumption to buy mongrel stocks at the beginning of the year.
Generally, if you’re looking for stocks with upside potential, picking a beaten-up sector is a good way to find turnaround stories.
Last year’s comeback kid was the housing industry, which has been limping along since the 2008 meltdown. One of the biggest winners was the PulteGroup, the homebuilder that posted negative returns in four out of the past five years through 2011. The company has soared about 169 percent on the rebounding housing market for the past 12 months through January 9 as the market is continuing to favor the sector in 2013.
Also jumping on that bandwagon was another homebuilder, Lennar Corp, and appliance maker Whirlpool Corp, which rose 102 percent and 113 percent, respectively, during the same period.
The financial sector, still bruised after 2008 and on the rocky road to recovery, delivered big returns, too. Bank of America - a tough bet to make given the mammoth bank’s myriad problems - has almost doubled in value (up 83 percent). Financial stocks as a group in the Standard & Poor’s 500 index have risen more than 26 percent - leading all sectors - but none have cracked the top-10 list.
If you were to bet on the beaten-down sectors of 2012 that may be due for a rebound in 2013, you’d probably choose energy and utilities, two of the worst-performing groups last year.
Despite the often outsized rewards of the contrarian tactic, few investors are able to make picks of down-on-their-luck companies, so a more-palatable strategy is needed.
Sometimes, the most consistent leaders stay in the top-tier of the S&P 500 for extended tenures. Last year, the familiar names that influenced business news in recent years maintained their leadership as the most popular stocks by market capitalization in the S&P 500 - Apple Inc, ExxonMobil, Microsoft Corp, General Electric and International Business Machines Corp.
Even more interesting are the companies that stay on the list from year to year. ExxonMobil has been in the top five for 14 years running and part of the leaders as either Exxon or Mobil (prior to 1999) going back for decades. Microsoft has been on the list for 18 straight years, owing to its near-monopoly over personal computing operating systems. GE has been on the list since 1980 - except for 2008 - having grown into a conglomerate that provides everything from financial services to jet engines.
What ties these companies together is the importance of their products and services to the overall economy over time.
Here’s a snapshot:
* The information technology age is held together by computing power, so that’s put big players like Apple, Microsoft and IBM into leadership positions.
* Energy is a perennial need. At no point since 1980 has the S&P leader list not included an energy company like ExxonMobil or the other top petroleum producers.
* We will continue to spend money on drugs and consumer staples. Less heralded are pharmaceutical giants like Johnson & Johnson, Pfizer Inc and Procter & Gamble. This group has traded places on the S&P leader board every year but one (1999) since 1986.
Not all of these stocks are bullet-proof, however. A single year like 1999 proves the folly of investing in last year’s beauty-contest winners due to market bubbles.
During the height of the tech mania in 1999, America Online, Cisco Systems Inc, Intel Corp and Lucent Technologies were among the most popular stocks. Those companies have long fallen off the list, and only Intel and Cisco managed a comeback, in 2000, but haven’t been among the top five since then.
This begs the argument of which is the best way to invest in the future. History gives you a clue - pick durable companies with solid business models, and growing earnings and dividends. But who knows which company will become the next ExxonMobil or the next Lucent? And how do you avoid the mistake of conflating popular companies by market valuation with those with more upside potential?
Keep in mind that S&P leaders may not offer the best-possible appreciation potential, but they are persistent dividend producers over time.
The simplest approach is to hold the entire S&P 500 index and then some. You can buy all 500 stocks through the Schwab S&P 500 Index fund, which is the cheapest way of owning the entire basket at 0.06 percent annually for management expenses. And even broader choice is the Vanguard Total World Stock Index exchange-traded fund, which owns about 7,400 stocks from 47 countries. Both can be core portfolio holdings that don’t require you to be able to discern mutts from the best-in-show over time.
(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see)
Follow us @ReutersMoney or here Editing by Lauren Young and Richard Chang