Morningstar’s famous “buy the unloved” strategy involves investing in the three mutual fund categories that suffered the most outflows last year and selling the three most heavily purchased of last year. But a better strategy would be to buy both, argues Sam Stovall, chief investment strategist at CFRA.
Specifically, Stovall suggests buying last year’s 10 best and 10 worst performing sub-industries in the S&P 500. Just look at history. Since 1991, the 10 best performing S&P 500 sub-industries from the prior year, held in equal proportions during the coming year, delivered a compound annual growth rate of 12.4 percent, beating the S&P 500 68 percent of the time. Meanwhile, the 10 worst performers returned a 12.5 percent CAGR since 1991, outpacing the market 64 percent of the time. But a portfolio that combines the two would have delivered a compound annual growth rate of nearly 14 percent over that time period, besting the market 77 percent of the time. That’s a 600-basis-point improvement over the S&P each year.
“Despite the lack of a guarantee that what worked in the past will work again in the future, one could say that the outcome of owning the good and the bad wasn’t so ugly after all,” Stovall said in a report.
So where should we invest in 2017? Here are 2016’s 10 best and 10 worst performing sub-industries and the S&P 500 stocks that serve as proxies for those sub-industries. (Using CFRA’s MarketScope Advisor platform, Stovall screened for the proxy companies within each sub-industry based on the highest CFRA STARS and target price differential.)