"Avoid hot stocks in hot industries. Great companies in cold, nongrowth industries are consistent big winners"

Question

Do you agree with this statement?

Answer 1

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Answer 2

It depends on market conditions.

When markets are in uptrends, which they are not currently, growth stocks that tend to hail from leading sectors, i.e. hot industries, can perform extraordinarily well. Look at the past market history going back 50 years, every bull market cycle as had a fresh batch of new companies that often come from 'hot industries'. Where was the computer industry before microsoft in the 90s, that stock did pretty good, but in recent years its been pretty flat, in now a 'cold' industry 20 years later. Remember cisco in its heyday, who heard of networking prior to cisco. That stock did ok, too, up a couple thousand percent. So during market uptrends, new leaders emerge always, and they can produce great results.

However, in sideways or bear markets, there is always a tendency for value investors to look at boring companies, with good balance sheets to place money for safety. And relative to market performance, these stocks can do ok during turbulent market times, and sometimes pay a dividend for added benefit because they don't have growth.

But for consistent 'big winners', no you need to be invested in new stocks from new industries.

Recent market examples include solar and alternative energy plays. Who heard of First Solar, FSLR, prior to its IPO from Goldman Sachs last year? Well, new industry solar, and new company. It was up over 200% last year alone. You can't find any value, nongrowth stock that even came close.

Answer 3

It has potential depending on your time frame, and your ability to evaluate the definition and compliance with what an undervalued company is regarding book value vs. market.  Warren Buffett has done well in that manner. He claims to ignore stock price and evaluates the company on whether it is a great business or not.  In any case, buying at the top of the market is typically not a good strategy

Answer 4

I have to agree with Carom Capital on this.

This statement seems to simply raise awareness to the likelyhood of profit taking and rapid change in sentiment. One has to realise that one has more of a time limit on the realisation of profit in hot industries. Hot industries can bring great growth to your portfolio, but you have to watch for slows in momentum and shock selling. At the end of the day. If you're happy to keep an eye on the market and using some more advanced orders such as trailing stops, the hot stocks can really boost your portfolio. Just realise that all industries were new at some point. Just know when to sell and dont ignore the fundamentals on the basis of greed. Watch those balance sheets!