Investors love trends, charts and numbers. We have to — because if somehow we can plot a trend from a mess of candle graphs and historical data, we can convince ourselves our portfolio will be profitable in the months ahead.
Right now investors are being overloaded with a myriad of year-end recaps highlighting the best stocks and sectors from the last 12 months, but make sure you read all of these stories with a grain of salt. They tend to offer little insight on the future performance stock market and acting on them can do more harm to your portfolio than good.
Best Stocks of 2010 Were Worst of 2009
At the end of 2009, investors were thrilled with the way the stock market had bounced back from the March lows and was humming into a new year. The typical “year in review” story in December 2009 would have highlighted these stocks as some of the Dow’s top five performers:
- American Express (NYSE: AXP), +126% in 2009
- Microsoft (NASDAQ: MSFT), +60% in 2009
- IBM (NYSE: IBM), +59% in 2009
- 3M (NYSE: MMM), +49% in 2009
- Alcoa (NYSE: AA), +47% in 2009
The average gain of this group is 68% — better than three times the broader Dow’s 23% gain on the year. Even the “worst” of this group doubled the index’s returns.
So how have the best of 2009 fared this year? In a word … badly.
- American Express (NYSE: AXP), +16% in 2010
- Microsoft (NASDAQ: MSFT), -8% in 2010
- IBM (NYSE: IBM), +13% in 2010
- 3M (NYSE: MMM), +5% in 2010
- Alcoa (NYSE: AA), -11% in 2010
With the Dow Jones Industrial Average up about +10%, only two of these top five picks have outperformed the market. When you take the average return of the five stocks, you squeak out a +3% gain – barely better than the anemic return of a CD.
To add insult to injury, two even made the five worst performers of 2010 – Microsoft and Alcoa, coming in at #26 and #27 out of 30, respectively.
Worst Stocks of 2009 So-So in 2010
Now that we’ve soundly proven that past performance doesn’t mean future returns for the coming year, what about the worst performers?
A look at the numbers shows that being one of the dogs of the Dow one year means you’re ripe for a rebound. Take a look at the worst five components of 2009:
- Verizon Communications (NYSE: VZ), +4% in 2009
- Procter & Gamble (NYSE: PG), +1% in 2009
- General Electric (NYSE: GE), -2% in 2009
- Wal-Mart Stores (NYSE: WMT), -3% in 2009
- ExxonMobil (NYSE: XOM), -13% in 2009
That’s pretty ugly, with an average return of -1% despite a surging market that added 23% to the Dow Jones index.
Now look at how these stocks performed year-to-date in 2010:
- Verizon Communications (NYSE: VZ), +9% in 2010
- Procter & Gamble (NYSE: PG), +7% in 2010
- General Electric (NYSE: GE), +20% in 2010
- Wal-Mart Stores (NYSE: WMT), +3% in 2010
- ExxonMobil (NYSE: XOM), +9% in 2010
Though aside from GE most have tracked or underperformed the Dow’s +10% gain on the year, the average return of the group is pretty darn close to the broader index.
What Predicted the Best Stocks of 2010?
The short answer is “nothing.”
Consider McDonald’s (NYSE: MCD), which has gained almost +28% in 2010, almost four times the broader market. In 2009, however, it gained a mere 4% compared with a +22% gain for the Dow Jones.
Of course some high-flying stocks did post another strong year. One of the best performers in the Dow of 2010 is Dupont (NYSE: DD), with +50% returns year-to-date. That comes after returns that nearly doubled the market in last year — specifically, a +41% gain vs. 22% for the Dow Jones Industrial Average in 2009.
Perhaps most muddling is that most of the top performers this year were middle-of-the-road picks last year, including 2010’s top-performing stock Caterpillar (NYSE: CAT). CAT is up 62% year-to-date after only moderately outperforming the market in 2009 with 33% returns.
What does all this add up to? Unfortunately, not much. The clearest lesson drawn is an obvious one: Markets are cyclical and blue-chip stocks that had their moment in the sun one year rarely stay top performers the next.
Or to beat a tired, old drum, past performance does not indicate future returns.
As you peruse the copious offerings of year-end stories out there, keep in mind that these stories are simply a lighthearted look in the rearview mirror and nothing more.
They may be fun to read, but your best bet for a profitable 2011 is to focus on the future.
A full table of 2009 and 2010 YTD results for the Dow Jones components (through the market’s close Friday 12/10) follows if you want to draw your own conclusions. Prices are based on historical data adjusted for splits and dividends.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter at http://twitter.com/JeffReevesIP.
