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Top Trends from 2011

Every January, we publish two special issues of the Dick Davis Digests, featuring our contributing experts’ favorite stock picks for the coming year. In addition to giving subscribers direct access to our contributors’ best ideas, the Top Picks issues also provide an at-a-glance look at expectations for the coming year. On...

Every January, we publish two special issues of the Dick Davis Digests, featuring our contributing experts’ favorite stock picks for the coming year. In addition to giving subscribers direct access to our contributors’ best ideas, the Top Picks issues also provide an at-a-glance look at expectations for the coming year.

On January 4 of this year, I shared some of those expectations with Investment of the Week readers, distilling the Top Picks into 10 likely investing trends for 2011. Now that the year is almost over, I thought we’d revisit some of those trends to see how they played out.

1. Communications Technology

In January, I wrote: “Of the 50-plus stocks our contributing experts nominated as top picks for 2011, over a quarter are technology stocks. Of those, nearly half are companies involved in communications or networking technology. The growing number of cell phone users, both in the U.S. and abroad, the increasing amount of video delivered over the Internet, and the growing popularity of cloud computing are all putting unprecedented demand on both broadband and wireless networks. Companies that make these networks larger, faster or more efficient are the prime beneficiaries.”

The technology sector overall actually underperformed this year, but some individual winners did manage to distinguish themselves. At mid-year, a communications technology stock, Elephant Talk Communications (ETAK), was the best-performing Top Pick; with the market correction since then, it’s up about 22% year-to-date. Konrad Kuhn (The Konlin Letter) recommended ETAK. The second-best performer at mid-year also came from the communications technology sector—Allot Communications (ALOT) was recommended by Ian Wyatt in SmallCapInvestorPRO, and is up 47% year-to-date.

Of course, a never-ending parade of global worries meant that communications technology wasn’t really in the news this year. You could say that these companies don’t make headlines, they just make money. The fundamental factors propelling progress in the sector are still in place, so it should get a little more love once the sun shines again.

2. Oil, Gas and Coal

I predicted that oil, gas and coal investments would be popular this year based on the number of energy companies chosen for the Top Picks. And as expected, drillers, miners, refiners, pipelines and other energy-related companies were some of the year’s best performers. The rapid growth of the North American oil and gas industry helped immensely, creating demand for everything from LNG tankers to fracking fluids.

Energy companies made frequent appearances in both the Investment Digest and Dividend Digest over the course of the year. Some of the best income-generators in the Dividend Digest came from the energy sector. Pipelines and drillers with gushing cash flows passed their profits on to investors in the form of monthly dividends and double-digit yields.

The single best-performing stock of 2011 was from the energy sector—Cabot Oil and Gas Corp. (COG) has gained almost 100% year-to-date, as its production skyrockets.

3. Food and Agriculture Stocks

Agriculture was a winning bet in 2010, and as 2011 began, many analysts expected the trend to continue. However, the sector overall has not been a winner, with both the major agriculture exchange-traded funds (ETFs) [Market Vectors Agribusiness (MOO) and Powershares DB Agriculture (DBA)] down year-to-date. That doesn’t mean it was a bad place to invest though: Smithfield Foods (SFD), dividend-paying Hormel Foods Corp. (HFD) and Tyson Foods (TSN) all would have been good choices this year.

4. Consumer Stocks

In January, I wrote: “The majority of experts say they expect the economy to continue to improve gradually in 2011.” Instead, we got a sort of fits-and-starts recovery, as measures of growth waxed and waned and consumer pessimism tempered most good reports. However, consumers increased their spending despite their pessimism, causing some analysts to scratch their heads. And while the spending was good for consumer companies, the head scratching was less-than-great for their stocks, making it a mediocre year for the consumer discretionary sector.

5. Gold

I begrudgingly included gold investments on the list of trends based on the number of gold stocks in the Top Picks. At the time, I wrote: “While I’m reluctant to put it on the list—I’m getting tired of reading and writing about the stuff, quite frankly—enough investors and advisors are still enthusiastic about gold that it will probably remain a hot commodity for at least part of 2011. Their reasons vary—some say paper currencies will collapse, others cite institutions’ still-small positions in gold—but the reasons don’t matter: their enthusiasm does.”

As it turned out, gold did do well for “at least part of 2011.” Most of the gold-related Top Picks would have been good bets through the first half of the year. But then gold prices, and the investments tied to them, faltered. In most cases, it would have been prudent to sell in August.

Gold still has plenty of cheerleaders, but its fan club is a shadow of what it used to be. Only time will tell, but I don’t think gold will be a major trend in 2012.

6. Banking and Finance

In January I wrote about the potential of “good” banks, which were attracting analyst attention as potential “diamonds in the rough.” It was certainly a viable trend; analysts continued to recommended small banks from coast-to-coast all year. Unfortunately, most of the investments have yet to produce significant positive results, partially due to the drag that Europe’s financial crisis placed on the whole finance industry. That may mean that the trend continues into 2012, when some of these value plays may finally start to pay off.

Next week, I’ll revisit more of the trends that defined 2011.

Wishing you success in your investing and beyond,

Chloe Lutts

Editor of Investment of the Week

Chloe Lutts Jensen is the third generation of the Lutts family to join the family business. Prior to joining Cabot, Chloe worked as a financial reporter covering fixed income markets at Debtwire, a division of the Financial Times, and at Institutional Investor. At Cabot, she is a contributor to Cabot Wealth Daily.