5 Winning Investments Set to Dominate Again

Bottom feeding, or deep value investing as it’s more commonly known, is something that many investors get tempted by, especially during the New Year portfolio cleanup.

Buying stocks that have been beaten down over the last year is tempting and can reward shareholders that are willing to take on more risk, but if you are looking for a lower risk strategy; try this. Buy the winners – those stocks that outperformed all others. Why? Because they tend to outperform those stocks that investors might consider deep value. Most stocks that grossly underperformed in 2015 did so for a reason.

Consider this – a strategy of investing in winners from the previous year has outperformed the broader market, as well as a strategy of investing in the worst performers.

If you look back since 2010, investing in the 50 best performing S&P 500 stocks of the previous year would have got you an average gain of 17% since 2010. Meanwhile, just the S&P 500 returned an average of 11% during that time.

Many investors consider themselves value investors and there’s no better place to find ideas than in the pool of stocks that are hitting 52-week lows. However, just investing in the 50 worst performing stocks of the previous year would have got you an average return of 12% – a full 5 percentage points a year below what you could have had by investing in the best-performing stocks.

With all that in mind, here are the 5 stocks to avoid in 2016 and 5 to own:

Stocks To Avoid For 2016

Fossil (NASDAQ: FOSL), absent some of the energy names, is the worst performer in the S&P 500 for 2015, with its shares down 66% on the year. Fossil is getting left behind as the market shifts more toward wearable devices. Fossil is still exposed to fashion risk, where switching costs are nil among watch buyers and brand loyalty is on the decline.

Then there’s Micron Technology (NASDAQ: MU) another major underperformer and one that was down 59% in 2015. This business is proving to be more commodity-like than many expected. It’ll face more competition in 2016 and will likely see its upside capped. This comes as Samsung and Hynix are getting more aggressive in the digital memory market.

Wynn Resorts (NASDAQ: WYNN), thanks to decent rally into the year-end this resort and casino owner only ended 2016 down 52%. Trading at 36 times earnings, it’s still not cheap. The overhang of a potential slowdown in China, including in Macau, will keep Wynn under pressure in 2016. It doesn’t help that the Chinese government is pushing to turn Macau into more of a non-gaming and full-resort destination site. This is bad news for Wynn, which focuses on high-end VIP gambling.

The Gap (NYSE: GPS) was one of the big disappointments in the retail space, although there was plenty of pain to go around in the industry for 2016. The Gap was down 37% last year. Competition in apparel retail was ruthless when it comes to price cutting and consumers are showing no loyalty, as they opt to shop at the likes of H&M and Forever 21 – unbranded apparel for cheap.

 

Cummins (NYSE: CMI) rounds out our list to avoid for 2016 as it was down 36% last year. Cummins is facing a lot of pressure as one of its largest customers, Paccar (NASDAQ: PCAR), started selling its own heavy-engine in North America.

Stocks Worth A Closer Look For 2016

Nike (NYSE: NKE) shares were up 35% in 2015, hitting all-time highs. However, there could be more in store for 2016, where Nike’s premium prices are still holding up. It managed to raise prices in 2015, while keeping a stronghold on the faster-growing Chinese market. The beauty of Nike is that while shoppers are showing no loyalty when it comes to where they buy (retailers), they are showing loyalty to what they buy (brands like Nike).

Activision Blizzard (NASDAQ: ATVI) was one of the big winners in 2015 – shares are up 98%. This company is a leader when it comes to being able to create multi-billion dollar video game franchises. Halo has been big for them in the past, as has Call of Duty, but it’s putting faith in the likes of Destiny and Skylanders with game launches planned for 2016.

Fellow video game maker,Electronic Arts (NYSE: EA), was another big winner in 2015, with shares up 48%. It’s a leader in the sports game industry, where it owns over 50% of the market share for sports game sales. 2016 could be a banner year for EA as it juices its expansion into mobile and online gaming.

Verisign (NASDAQ: VRSN) shares were up 56% in 2015, which is impressive for a company that simply offers domain names. It’s a leader in the market for .com domain names. It has strong pricing and competitive advantages that’ll carry over to 2016 and beyond. This includes its contractual agreements with ICANN, which affords it pricing power. Its .com contract runs through 2018.

Expedia (NASDAQ: EXPE) shares were up 51% last year. Trading at less than 20 times earnings, it’s still relatively cheap. Top competitor, Priceline (NASDAQ: PCLN), trades at close to 27 times. Expedia is already ahead of the game with attacking the mobile market – having about a third of its bookings done via mobile. The driving force for Expedia in 2016 should be online travel growth in emerging markets and China – as well as a greater adoption of online booking there.

In the end, you might not even need to own the top 50 winners from 2015 to best the market in 2016. The answer likely lies in owning the best 5 to 10 stocks that can carry their momentum through 2016.