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Can Banks and Housing Companies Perform as Well in 2013 as They Did in 2012?

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Changing attitudes towards unpopular industries helped these stocks last year, but can they repeat their performances?

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Still, there is at least one indicator that suggests – in a contrarian kind of way – that financial stocks, at least, may extend their outperformance. A study of 2012 picks by Wall Street strategists, monitored by Birinyi Associates, showed that the financials came second to last among their recommendations. This year, only three of the nine Wall Street strategists Birinyi is watching have suggested that investors overweight the group. If these strategists remain poor prognosticators, the odds favor some further gains.

There is one big argument in favor of an extended rally, both for financial stocks (especially those that are still coming back from the edge of the precipice) and for stocks as a whole. That is the relatively muted level of investor enthusiasm, and the willingness of the market to be spooked by headlines. There's no irrational exuberance to be found here (even in the midst of a relief rally in the wake of a temporary deal avoiding the 'fiscal cliff'), but only the proverbial wall of worry.

The gains in the homebuilding stocks and in the banking sector's big winners serve to remind us of an even more important point: Regardless of what the broad market may do – or even how individual sectors perform – above-average returns come down to which stocks you own and which you avoid. Investors in actively managed mutual funds whose portfolio managers believed that Bank of America was undervalued a year ago are almost certainly celebrating more than those whose managers' exposure to the financial sector was confined to safer bets like JPMorgan and Wells Fargo.

The odds heavily favor the gains from a handful of individual companies in 2013 dwarfing those of the market as a whole. That doesn't mean that you should rush out and buy stocks that the market today looks on with loathing – certainly, not all unloved stocks enjoyed the gains that Bank of America or PulteGroup did in 2012, and steering clear of big losers is often the key to posting long-term gains.

But as we make our New Year's resolutions, this is the time to remind yourself to keep an open mind, and to look for signs that the market's bearish consensus on a particular company or industry may no longer be supported by the evidence. It might take time for the market to believe that a turnaround story is real, but it is precisely during that time that an investor who is able psychologically and financially to put some money at risk will be able to capture the biggest gains.

Editor's Note: This article by Suzanne McGee originally appeared on The Fiscal Times.

For more from The Fiscal Times:


2012 Stock Market Winners and Losers

How Drug Traffickers Used HSBC To Launder Money

Why Venture Capitalists Are Bearish About 2013


Follow The Fiscal Times on Twitter @TheFiscalTimes.

No positions in stocks mentioned.
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