Shares of mining companies, real estate investment trusts and utilities had a rough year in 2014. Not only did these stocks miss out on a historic 29.6% increase in the value of the Standard & Poor's 500, some in many cases suffered losses.
Missing out on the best stock market since 1997 leaves investors with the conundrum over whether last year's losers might be compelling values that could do well this year, or if they're still in a bad spot. "When stocks are down, they're down for a good reason," says Sam Stovall of S&P Capital IQ. "Investors often just want to sell their dogs and move to something else."
Analysts, though, that study individual sectors and industries think investors might be making a mistake in bailing out of last year's losers, including:
* Mining companies. Companies that extract commodities from the ground or process them have been an area of great disappointment for investors. The mining industry was among the worst of 2013, and mining companies Newmont Mining and Cliffs Natural were both among the very worst stocks of the year, down 50% and 32% respectively. Forces that pummeled mining stocks, though, may ease in 2014, says Michael Dudas, analyst with Sterne Agee. Miners were hurt with falling prices of commodities including gold and silver, Dudas says, as investors dumped metals and moved into stocks. But it's unlikely stocks will do as well in again 2014, which could help metal prices, he says. "These stocks were down 40% and the (stock market) was up 30%," Dudas says, adding he expects a recovery in 2014. Meanwhile, many commodity producers have stopped expanding capacity, which could help control supply and aid prices, he says.
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* Real-estate investment trusts. As a broad! group, REITs were among the laggards missing out on the year's rally. The Vanguard REIT Index, excluding dividends, fell 1.2% in 2013. REITs suffered a bad year in 2013 as rising interest rates make the yields paid by real-estate companies less attractive, says Michael Widner, analyst with Keefe Bruyette & Woods. This year, though, could be a different story. Mortgage REITs, a type of real-estate company that buys mortgages, have an average dividend yield of 12.5%, he says. With fears of rising rates priced in, the value of the mortgages these REITs own should be more stable and the stocks could rise, Widner says.
That's not to say buying last year's losers is a ticket to riches. Utilities, big losers in 2013, aren't expected to recover much. FirstEnergy, one of 2013's worst stocks with a 21% decline, is rated hold by the average analyst. Earnings at the company are expected to fall another 3% in 2014, better than the 11% estimated decline in 2013, but still a fall, according to a report by S&P Capital IQ's Justin McCann.
And historically, investors have done better, at least in a one-year period, investing in the previous best sectors and industries than they have with the worst, Stovall says. Buying the best three sectors yielded a 10.8% gain the next year, Stovall says, beating the market's average 9.5% gain since 1991. The biggest three losers, on the other hand, gained 7.9% and only beat the market 43% of the time, Stovall says.
"History suggests you're better off letting your winners ride," Stovall says. "But if you plan to hold for more than a year, then maybe these might be good opportunities."
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