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Top 10 Investing Trends of 2011

Last week, I looked back at the top 10 investing trends of 2010. In that issue, I promised a look forward to the trends that will likely dominate 2011. Of course, no one can say for sure what will happen in the future (distrust anyone who claims they can). It’s...

Last week, I looked back at the top 10 investing trends of 2010. In that issue, I promised a look forward to the trends that will likely dominate 2011.

Of course, no one can say for sure what will happen in the future (distrust anyone who claims they can). It’s smarter to invest based on the facts as they stand now—consecutive quarters of earnings growth, a chart’s strong uptrend—than on what you think the future might hold.

Nonetheless, the urge to prognosticate seems irresistible. Several experts weighed in on the reasons for this in a conversation on the New York Times’ website last week. Although, for the most part, grounded in no more science than predictions themselves, the explanations were interesting, ranging from the obvious to the philosophical. Simon Winchester, a geologist, wrote: “Long-term forecasts seem to me rather like time capsules, designed more to provide retrospective amusement for those who eventually have to read them, than to be taken seriously as they are first uttered.”

David Ropiek, an author, wrote, “I predict that far in the future, people will still be trying to predict what will happen far into the future. For the same reason we do it now—to give ourselves the feeling of control over our fate.”

Stacy Schiff, also an author, attributed some of our predilection for predicting to the urge to say, “I told you so.”

Sherry Turkle, an M.I.T. professor, wrote, “Prediction has a purpose. It is not to win a bet about the future, but to express a hope about what we might like the future to be.”

And Edward Tenner, an author and historian, wrote about why even incorrect prophecies have value, and why, “Societies, like individuals, sometimes need positive illusions.”

In the world of investing, prognostication has a more obvious aim: To increase the odds of betting correctly on future events.

And around this time of year, the demand for such predictions is higher than usual. Many of the Dick Davis Investment Digest’s contributing editors acquiesce with predictions and expectations for the coming months. We ourselves ask them to pick their favorite stock for the next year, for our Top Picks for 2011 issue (which you can still get if you subscribe today). Based on those picks and their predictions, I’ve cobbled together the following list of which sectors and stocks the experts expect to outperform in the coming year. So, with a reminder that the best way to invest is by looking at evidence, not expectations, here are the Top 10 Investing Trends of 2011:

1. Communications Technology

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. One of my personal favorites, recommended in the Investment Digest Top Picks issue by Jim Oberweis and David Covas of The Oberweis Report, is MIPS Technologies (MIPS), a semiconductor designer. MIPS’ semiconductors are currently used primarily in so-called “embedded” applications—MIPS sells semiconductors to a company like Sony or Panasonic that embeds them in devices like TVs, cable boxes and remote controls. However, MIPS is currently expanding into the much more lucrative cell phone market. The growing use of Google’s open source Android operating system for smartphones gives MIPS a great opportunity to challenge ARM Holdings’ (ARMH) dominance in the cell phone semiconductor market.

2. Oil, Gas and Coal

There are six energy investments among the Investment Digest Top Picks: two oil and gas drillers, one coal miner, one uranium play, one energy-focused investment company and an energy sector ETF. The income-paying picks in the Dividend Digest contain four more oil-, gas- or coal-focused companies. As Mark Salzinger, editor of the Investor’s ETF Report, wrote in his submission:

“Our top pick for 2011 is Energy Select Sector SPDR (XLE). Even though the price of oil has more than doubled since early 2009, the increase has been less impressive than those of many other commodities. For example, while gold and silver are at or near all-time highs, oil is about $40-a-barrel lower than it was at its peak before the credit crisis. We think oil can catch up, especially if the job picture (and thus gasoline usage) continues to improve. Demand for cars should be strong in China (despite government efforts to curb congestion in major metropolitan areas) and other growing markets.”

Other predictions for the energy markets revolve around the rapidly changing natural gas market, partially the impact from Canadian gas shales, and its potential to change the amount and type of energy North America imports and exports. Roger Conrad recently wrote in Utility Forecaster:

“Even if natural gas prices remain weak, prosperity will continue to build in the North American energy patch in 2011. For one thing, oil prices are very strong. And they’re likely to get stronger in the coming year on surging Asian demand and a growing global reliance on higher-cost supplies such as deepwater and tar sands.”

3. Food and Agriculture Stocks

Agriculture stocks have had a great year, as we discussed last week, thanks both to rising commodity prices and takeover fever. Analysts expect the trend to continue into 2011. Agriculture- and food-related stocks recommended in the Top Picks issues include a maker of farm equipment, a leader in food safety testing, a cooking oil processor, and a Chinese pork producer. Some arguments for a continued bull market in agriculture stocks cite a Malthusian squeeze of the global food supply—I don’t buy into those. But I do recognize that growing populations and rising incomes, especially in developing countries, will affect demand for food for years to come. Accordingly, my favorite play from this group is Zhongpin, Inc. (HOGS), the large Chinese pork producer. Daniel Sevier of the PAD System Report chose Zhongpin as an Investment Digest Top Pick.

4. Consumer Stocks

Last week we talked about retail’s gradual resurgence over the last 12 months. The majority of experts say they expect the economy to continue to improve gradually in 2011; some are predicting a multi-year economic expansion. In even the most conservative case, consumer stocks will benefit. One of the most interesting consumer-driven recommendations among the Top Picks is a company that licenses 3-D video technologies to theaters and home electronics companies. Sales of movie tickets will benefit from any increase in discretionary spending. And sales of home electronics like TVs have not yet recovered as much as other consumer sectors; 2011 could be their year.

5. Gold

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. The upcoming Top Picks issues feature six gold stocks, mostly miners, as well as the SPDR Gold Trust ETF (GLD).

6. Molybdenum, Copper and other Metals

It doesn’t appear that interest in other metals is anywhere near waning yet either. There are two molybdenum miners among the top picks (moly is used primarily in industrial applications) as well as an ETF that holds physical silver and a few copper plays. As Yiannis G. Mostrous and Roger S. Conrad wrote in a recent issue of Silk Road Investor:

“The New Year is just around the corner, but some things remain unchanged—we still like metal stocks. The global economy will continue to stabilize in 2011 and the economic recovery will surprise many investors with its sustainability, though not its vigor. All of this means that demand for commodities will remain strong next year. … That emerging Asia has an insatiable appetite for energy is well known to any investor this side of Rip Van Winkle. Considerably less appreciated is the East’s even faster-growing demand for base and industrial metals, which are the building blocks of all economic growth. … In 2009, while the rest of the world was mired in recession, copper demand in China rose 20% to 5.94 million metric tons. And demand rose by at least a mid-teens percentage in 2010, as the country continued to add infrastructure nationwide at a rate equivalent to building a mid-sized city every year.”

7. Green

Alternative Energy had an off year in 2010, largely because of the ongoing effects of the recession in the U.S. and the debt crises in Europe, which forced cuts to some of the world’s largest alternative energy subsidies. But the forces pushing us toward cleaner energy sources are still intact, and Green companies are constantly introducing new, money- and planet-saving technologies. Some of the most exciting technological advancements of our time are happening in the Green sector, and I think they’ll start attracting investor interest and money again in the next year. Green cars could be one of the fastest-growing segments in the next 12 months. The much-hyped all-electric Nissan Leaf will be introduced in some markets, as will other, less-ambitious hybrid models. And of course, China’s gung-ho entry into the alternative energy industry won’t hurt. This is a more hopeful and less evidence-based prediction.

8. Banking and Finance

“Good” banks have been good under-the-radar investments this year, and it looks like they may start to garner a little bit more attention in the New Year. The top picks include one small local bank, two specialty lenders, a financial holding company and a large European bank. The name of the game here is finding “diamonds in the rough”—quality companies that were unfairly dinged by the financial collapse and subsequent fear over new regulations. A return to fairer valuations in 2011 would buoy these stocks above the also-rans.

9. Inflation

Although there are plenty of dissenting voices, and the government has so far denied it, majority opinion is that inflation will be part of the U.S. government’s plan to create a sustainable economic recovery in 2011. One way to play inflation as an investment theme is to invest in U.S.-based companies that get a lot of their revenues from overseas. Commodities, hard assets and gold and silver also benefit—from both inflation and the expectation of it, as we saw in 2010. In a recent issue of Street Authority Investor Update, Nathan Slaughter recommended a couple more hedges:

“I think the dollar will remain the world’s reserve currency, largely because there are no viable alternatives. But we’re likely to see further erosion over the next few years, particularly if central banks continue dumping their stake in favor of gold, yen and other currencies. Fortunately, there are ways to safeguard your assets and even turn a nice profit. Gold is the obvious hedge, but there are other options (whose prices are also supported by strong emerging market demand). Instead of complaining about gas prices at the pump, buy oil producers like ConocoPhillips (COP). Tired of paying more for milk, cereal, and bacon at the grocery store? Fight back with PowerShares Global Agriculture (PAGG). In other words, convert your dollars into hard assets.”

10. Return to “Fair Value”

I’m not a value investor myself; I never try to calculate so-called “fair values” for stocks or the market. However, I have been reading fairly frequently that the market is still in the process of returning to a fairer valuation; struggling to get out from under the weight of the financial crisis and recession. So it seems likely that some of the best plays in 2011 could be stocks (much like the “good banks” mentioned above) that are under pressure but struggling to return to a more fairly valued level. If the experts are right, 2011 could be the year many of them make it there, and investors on board for the ride will be well-rewarded. As Jim Kelleher, Director of Research at Argus Research Group, recently wrote in their Weekly Staff Report:

“We are assuming that investors will increasingly recognize that the market remains inexpensive—not least because of the dismal net showing in the preceding decade—and that market valuations such as P/Es will undergo expansion. … On December 31, 1998, the S&P 500 closed at 1,229.23—within a percentage point of its level today, 12 years later. Earnings power is much enhanced, meanwhile; in December 1998, the 12-month value of S&P 500 operating earnings was in the mid-$40s, and a year later it had barely cracked $50. The 2010 S&P operating earnings estimate, according to Standard & Poor’s, is $83.60 for 2010, with $94.30 forecast for 2011 (the Argus estimates are $83 for 2010 and $93 for 2011). In other words, earnings have nearly doubled while the index value has stood still.”

Strong earnings results, which many analysts are expecting, will help discounted companies get back to where they “belong.” As Editor Charles B. Carlson recently wrote in DRIP Investor:

“Say what you want about the strength or the lack thereof of the economic recovery, but there is no getting around the fact that corporate profit growth has been nothing short of amazing. American businesses earned profits at an annual rate of $1.66 trillion in the third quarter, according to a Commerce Department report. That is the highest level recorded since the government began keeping track over 60 years ago. I suspect fourth-quarter profits will continue the growth trend, as will profits in 2011. Higher profits should drive higher stock prices in 2011.”

Carlson recommends blue chip stocks with strong earnings as the best way to play this trend, writing: “If there is a sweet spot for value in this stock market, it is big blue chips.”

Happy New Year, and may it be a profitable one for you!

Wishing you success in your investing and beyond,

Chloe Lutts

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.