Should You Buy the Big Winners of 2009? Maybe Shorting Them Makes More Sense

by: Invest With An Edge

By Brandon Clay

There are almost as many trading strategies as there are investors in the market. That’s why countless newsletters, stock services, and web sites sell their picks to anyone with a credit card. Investment publishing is big business.

Though most publishers tack on tiny disclaimers saying something like “past performance is not indicative of future results,” investors still try to predict future results. Just find a winning pattern in the past, create rules that would have successfully traded that pattern, and institute a system for future trades. It’s a little more complicated than that, but you get the picture. This is basically what we do with our free trading strategy: Market Leadership Strategy.

Investors sometimes try to ride the momentum of whatever worked well last year. This isn’t necessarily a good strategy, though. Let’s look at the top three stocks for 2007 and 2008 and how they fared in the following year.

To be fair, the 2008 results were not large cap stocks. But then again, most large caps were crushed in 2008. They just serve to show you that a good year does not another make. Here are the banner year results coupled with the not-so-great following year.

2007 Winners

Mosaic (NYSE:MOS)
+342% in 2007
-63.3% in 2008

Consol Energy (NYSE:CNX)
+ 122.7% in 2007
-60.0% in 2008

Hess Corporation (NYSE:HES)
+103.5% in 2007
- 46.8% in 2008

2008 Winners

Emergent Biosolution (NYSE:EBS)
+415% in 2008
-47.9% in 2009

Star Scientific (STSI)
+379% in 2008
-80.4% in 2009

Mexco Energy Corporation (NYSEMKT:MXC)
+237% in 2008
-19.6% in 2009

Should you expect the same sort of thing from top stocks of 2009 in 2010? Indeed, past performance is not indicative of future results. That might be especially true of the big winners. In fact, you might reconsider if the following stocks are on your buy list for this year. Here are the top-five large cap stocks that appreciated 300% or more in 2009.

XL Capital (NYSE:XL)
+395.4% (3.70 > 18.33)

Advanced Micro Devices (NYSE:AMD)
+348.1% (2.16 > 9.68)

Ford (NYSE:F)
+336.7% (2.29 > 10.00)

Genworth Financial (NYSE:GNW)
+301.1% (2.83 >11.35)

Micron Technologies (NASDAQ:MU)
+300% (2.64 > 10.56)

Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.