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For many, it was a year to forget. The cataclysmic events in Japan in the spring -- the earthquake, followed by the tsunami, followed by the nuclear crisis -- were soon followed by a string of global financial near meltdowns that ran from summer through winter's snow. From the European debt crisis to the downgrade of the nation's credit rating to an unbudgeable unemployment rate, the U.S. economy just couldn't catch a break.
The same could be said of investors -- a group, we might add, that includes no small number of pros. Through the third quarter, 72 percent of active mutual fund managers had underperformed their benchmarks. Still, our January 2011 "Where to Invest" portfolio managed to keep its head above water, rising 6.9 percent -- and besting the return of the S&P 500 by a hair. It was, we're happy to report, the seventh year in a row that we beat the broad market.
Some contrarian bets paid off in 2011; others were just plain ugly. A look at some of our leaders and laggards from the past year.
"Hot stocks from cold countries" (February) Danisco (DNSCY) Price then: $10 Price now: $17 Total return: (12/9/10 to 5/10/11): 62% This Danish food-ingredient maker was far away from the problems in southern Europe, but it had its own drama to deal with: DuPont offered to buy it out. Shareholders initially balked, but DuPont raised its offer and ultimately acquired the firm in May for $6.4 billion.
"The Profitable Product Niche" (May) True Religion (TRLG) Price then: $23 Price now: $35 Total return (3/2/11 to 11/11/11): 46% From retailers of pricey yoga pants to sellers of Ugg boots, stocks that catered to high-end consumers performed well throughout 2011. True Religion, maker of $300 jeans, surpassed investors' expectations, pushing its most recent quarter's sales 17 percent higher than a year earlier.
"Trading with the insiders" (November) Chesapeake (CHK) Price then: $31 Price now: $26 Total return (9/12/11 to 11/11/11): 14% Chesapeake Energy, picked because its top executives were buying its shares, settled a lawsuit in which its shareholders accused the company of paying too much to buy a map collection from the boss. The firm has since pledged to have a "more transparent" management pay plan.
"Trading Profits" (March) UTI Worldwide (UTIW) Price then: $22 Price now: $15 Total return (1/10/11 to 11/11/11): 29% As fears about a slowdown in the European and Chinese economies spread, stocks fell for firms that get a lot of business from their dealings with those countries. Analysts weren't overly impressed with the firm's ongoing restructuring efforts, either. UTI declined to comment.
"All-Star Performers" (June) Acme Packet (APKT) Price then: $72 Price now: $37 Total return (4/8/11 to 11/11/11): 49% Acme Packet, which builds devices that send data across Internet-protocol networks, had been consistently beating analyst expectations. But in the fall, the firm missed its quarterly earnings estimates, and its stock price plummeted. Acme Packet declined to comment.
Prices rounded; total return includes dividends. Source: Bloomberg
Our picks focused on large consumer, technology and industrial stocks -- several of which were priced in the bargain bin. As Douglas Cohen, head of Morgan Stanley Smith Barney's Strategic Equity Portfolio group, put it: "One would expect companies with age-old traits like leading market share and strong balance sheets to trade for more than the market." And when they don't, that often means a buying opportunity.
It was such thinking that led us to pick TJX Cos., owner of T.J. Maxx and Marshall's. Fear that the American consumer was tapped out had shoved even strong retailers onto the discount rack. That left shares of well-managed TJX, which had increased sales through one economic downturn after another, too cheap for many fund managers to ignore. True to form, TJX steamed ahead in 2011, boosting revenue at a 6 percent clip. Despite the stock being up significantly, Chuck Akre, manager of the Akre Focus fund, says the retailer's stock remains "crazy dirt cheap."
As a hedge, we also kept an eye on companies whose fortunes didn't necessarily need a robust economic recovery to do well. Since reruns of Law & Order and Keeping Up With the Kardashians have joined death and taxes as certainties in 21st-century American life, we looked at media firms as potential investments. Yes, Comcast was losing basic-cable customers in 2010 (it still is, actually), but its average cable bill was rising 10 percent a year. Meanwhile, the Philadelphia-based media giant was making up for losing cable viewers by adding hundreds of thousands of high-speed-data customers, who pay more than basic-cable subscribers do. All told, Comcast's sales and profits rose gradually year over year, and the stock returned nearly 11 percent for shareholders. The stock trades at about 10 times 2012's estimated earnings, which means it's still a decent value, many analysts say.
Not all our instincts paid off. We picked tech giant Cisco, for instance, because it was "smack in the middle of some of the biggest trends in technology" -- including cloud computing, which appealed to money managers like Channing Smith of Capital Advisors. But Cisco's flight to the cloud didn't lift the stock. Its total return is off 6 percent, and Channing says he sold his stake in the summer, after losing faith in the firm's management. Cisco declined to comment. (For the complete breakdown on our picks, visit smartmoney.com/2011update.) So where are the best buys for the year ahead? Our "Where to Invest in 2012" starts on page 50.
Where to Invest 2011
Prices rounded; total return includes dividends. Source: Bloomberg
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