How to Find the Home Run Stocks of 2011

Are you locked and loaded with the financial industry’s so-called “Top Stocks for 2011?” If you are, or even if you’re just mulling them, you may want to look beyond those names — these stocks don’t always pay off no matter how reputable their pickers may be.

You don’t even have to look too far back for proof. Last year, Assured Guaranty (NYSE: AGO), Apple (Nasdaq: AAPL), Hewlett-Packard (NYSE: HPQ), and Comcast Corp. (Nasdaq: CMCSA) were among the most-suggested picks for 2010. Yes, Apple and Comcast gained 54% and 29%, respectively, but Hewlett-Packard fell 19% last year, while Assured Guaranty lost 22%. By comparison, the broader market gained 11% during this timeframe.

That’s not meant to be a critique of the folks who picked those names in early 2010. It’s difficult to see the future. On the other hand, if the odds of success are 50/50 and the losing stocks lagged as badly as the winning names outpaced the market, what’s the point?

So which equities were last year’s actual leaders? And to be clear, we’re not talking about any wild and illiquid (not to mention unlisted) penny stocks either — we’re asking about legitimate companies.

As it turns out, 2010’s best performers were companies like communications firm IDT Corp. (NYSE: IDT), Finisar (Nasdaq: FNSR), a networking company, and biotech Questcor (Nasdaq: QCOR). They were up 471%, 233%, and 187%, respectively.

More amazingly, each of these companies was profitable in early 2010, and remained so during the course of the year. That’s not even the most interesting part of the story, though. What’s incredible about those three stocks is two-pronged.

First, nobody expected those kinds of monster gains from any of those off-the-radar names. Said more directly, no brokerage house or research firm was pounding the table on these big winners, though in retrospect they should have been.

Second (and related), all of those names were small and completely off the media’s radar. Of course, since there’s no large interested audience, why would any research departments bother putting a recommendation out there?

Now fast forward to today. Among the most recommended picks for 2011 are stocks like Sirius XM (Nasdaq: SIRI), Bank of America (NYSE: BAC), McDonald’s (NYSE: MCD), and Microsoft (Nasdaq: MSFT). If these names ring a bell, there’s a reason for that… it’s because they’re popular. They’re all widely owned, closely followed and big media draws as well. That also happens to be why it’s unlikely anyone will see something in them that somebody else hasn’t spotted first. 

Rather than follow the crowd and set yourself up for mediocrity, why not take the lessons of 2010 and apply them now? Let’s dig up some of the high-quality names nobody else cares about… yet.

1. KKR Financial Holdings (NYSE: KFN), an asset management firm based out of San Francisco, is the first pick I’m watching. The shares have been allowed to slip to about five times trailing twelve-month earnings, undoubtedly because of doubts that the company wouldn’t continue to produce income at its 2010 rate. It’s been a solid last six quarters though, with all of them being profitable, and four of them topping estimates. The anti-KFN argument doesn’t hold much water anymore and the stock’s cheap valuation has likely put a floor under the shares.

2. Sanmina-CSI Corp. (Nasdaq: SANM) is another potential Cinderella story. There’s a little more of a following with this circuit board maker, with seven analytical firms chiming in. The thing is, the aggregate opinion here is only a little better than a hold. It’s odd, given that Sanmina-CSI is dirt cheap, with a P/E of 8.5 here in the shadow of the best annual earnings per share (EPS) the company has posted since 2005. This year is slated to be a record-breaker. Go figure…

3. And finally, Boise Inc. (NYSE: BZ) is well-positioned for another great year, yet most of the financial world still doesn’t recognize it. The paper and packaging company started to grow profits again — by a lot — in 2010, and is on pace for a huge 2011. Boise is also valued at single digit earnings multiple — currently below eight.

So what’s the common element for all three of these stocks? Practically nobody’s thinking about them despite their well-supported fundamentals.

Action to Take –> There’s a lot to be said for owning a comfortable and familiar name. Odds are, however, a comfortable stock to you is also already owned by tons of other investors and institutions. That’s why top-touted stocks for any given year tend to be merely mediocre… no brokerage firm is going to stick their neck out on an unknown equity, and as such, they gravitate toward big, “household name” stocks.

That’s fine for safety purposes, but it’s very unlikely you’ll hit a home run. [In fact, Andy Obermueller, editor of Game-Changing Stocks, looks for nothing but off-the-radar stocks with home run potential.]

Instead, look to the names where few others are looking. You don’t even have to skimp on your quality standards, as many of these smaller companies are surprisingly and consistently profitable. You just have to be willing to find them. KKR Financial Holdings, Sanmina-CSI, and Boise are a great place to start that hunt.

Disclosure: James Brumley did not own any of the stocks mentioned in this article at the time it was written.

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