Probably the biggest lesson investors learned in 2012 is to avoid conventional wisdom. Investors who took the path less traveled with homebuilders (NYSEARCA:XHB) ended up beating the S&P 500 (NYSEARCA:SPY) by nearly 40%.
Heading into 2012, few were housing bulls. And for good reason. The housing market had sunk to multi decade lows and European woes had the media clamoring for a double dip recession.
However, focusing too much on what is widely touted by the masses can be treacherous for investors.
After all, even with the Greek, Italy and French bond yields soaring in late 2011, the MSCI EAFE (NYSEARCA:EFA) still went on to outperform the S&P 500 ETF by nearly 3% in 2012.
The lesson carried over into financials, which were also among the best performers this year. The Financials Select Sector Index ETF (NYSEARCA:XLF) returned nearly 27%. The capital markets (NYSEARCA:KCE), K B W Bank Index (NYSEARCA:KBE) and K B W insurance ETF (NYSEARCA:KIE) all handily outpaced the broader market.
Again, conventional wisdom would have had you sidelined in financials in 2012. Yet, those willing to focus less on the media darlings and more on rising commercial loan activity were rewarded.
Overall, the S&P 500 itself did a great job for investors, increasing 14%. But, investors in small cap (NYSEARCA:IWM) or mid cap (NYSEARCA:MDY) did better. Those riskier and more illiquid stocks posted a higher standard deviation in daily return, at 1.03% and 0.95% versus 0.80% for the SPY. So, the extra return came - as expected - with higher risk.
Finally, one of the most contrarian plays in 2012 was long healthcare. In Q1, healthcare stocks were widely shunned ahead of the Supreme Court hearing regarding the legality of Obamacare.
Those investors willing to take the other side of the argument rode biotech (NASDAQ:IBB) and the broader healthcare basket (NYSEARCA:XLV) to a nearly 30% and 16% return. In the case of the XLV, the excess return came alongside less risk with the ETF's daily standard deviation of 0.68%.
As we move into 2013, investors should look to 2012 and ask what conventional wisdom is touting today and whether there's a contrarian play. Such questioning may have you considering beaten down coal (NYSEARCA:KOL), which fell more than 22% this year amid sky high utility stock piles. Or, semiconductors (NYSEARCA:XSD), which endured a PC driven malaise this year.
What do you think are the best contrarian plays for 2013? Let us know in comments.
Source: E.B. Capital Markets, LLC
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.