Behind the Money

50/50 Shot: Stock Picking Makes a Comeback


It truly was a stock picker’s market in 2011, with components of the Standard & Poor’s 500 stock index almost split down the middle exactly by performance. As of Dec. 23, 247 stocks are higher year to date, while 253 are lower. The benchmark for U.S. equities is essentially little changed for the year.

New York Stock Exchange
Photo: Oliver Quillia for

Since the financial crisis three years ago and amid the current euro zone calamity, investors continue to decry the inability to deliver alpha through stock picking. Every stock for a time seemed to swing together on any given day, as central banks added liquidity to the system or capital shortfalls threatened to remove it. In the end, however, they didn’t all move together.

Many active managers were caught flat-footed by this, thrown off by the macro issues and so either holding too much cash or overweight in the hardest-hit sector yet again this year: financials. It seems they paid the price for this behavior, as equity mutual funds on average underperformed the S&P 500 this year, losing 2.6 percent, according to Morningstar.

“As an active investment professional, it was my duty to try to keep clients out of harm’s way in case we had a Lehman-like event in the euro zone,” said Mitchell Goldberg of ClientFirst Strategy. “No doubt, many of my colleagues acted with the same protective qualities. As a result, we had more cash on hand than we’d normally want.”

The financial sector in the S&P 500 lost 18 percent this year, led by a 59 percent pounding in shares of Bank of America . The industrial and material sectors also fell, while technology and energy sectors are little changed. Consumer discretionary shares, staples, health care, and utilities are in the black as a group.

First Solar is the biggest loser in the S&P 500 this year, down more than 70 percent. Following the solar player in futility are shares of Monster Worldwide , Alpha Natural Resources , MEMC Electronic Materials , Bank of America, and Netflix .

Cabot Oil & Gas was the top performer in the S&P 500, doubling in value. Other big winners following Cabot included El Paso , Intuitive Surgical , and Mastercard .

Goldberg and other investors said that after their hesitant approach to 2011, they’re ready to take advantage of the stock-picking environment that they believe will continue next year. Goldberg is concentrating on stocks with strong balance sheets, high dividends, and global revenue streams, as they’re set to benefit most from a modest economic recovery, he said.

“The historically high correlation we have seen across asset classes will end, if it hasn't already,” said Mike Murphy, CEO of Rosecliff Capital. “Stocks will trade on fundamentals in 2012, not on global fears.”

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