Many things in the world of finance are counterintuitive, and when it comes to picking stocks, there is plenty of room for the individual investor to be misled by conventional logic. In an effort to determine which stocks will perform best in the coming year, investors can be tempted to look back at last year's best-performing stocks in the hope of riding their coattails for continued market outperformance in the coming year.

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Last Year's Winners,This Year's Losers
But while investors are often keen on following last year's superstars, a decision to use this seemingly logical approach is flawed from the beginning. All too often, the stocks that performed the best in the previous year can fail to keep up with the market index the following year, and in many cases can do significantly worse. This is because, once a stock becomes widely accepted as an outstanding performer, its valuation tends to be bid up to such high levels that it is unable to sustain market-beating returns going forward.

Last Year's Losers Lead the Way
Conversely, companies that have produced less-than-stellar results can be subject to such universal dislike from the investment community that their share prices are driven down to unreasonably low valuations. It is these types of companies that can often end up generating the best returns, going from being labeled a disaster one year to a darling the next.

For individual investors, the goal should be to identify and purchase stocks that have viable long-term business models, but are sufficiently out of favor such that their share prices have been sold off to low valuations. With that in mind, here are five stocks that are near their 52-week lows, despite having positive earnings history and growth expectations.

Company Current Price 52-Week Low Forward P/E
Education Management Corporation (Nasdaq:EDMC) $15.56 $14.74 8.6
Gilead Sciences (Nasdaq:GILD) $33.39 $31.73 8.7
Western Digital Corporation (NYSE:WDC) $28.74 $27.12 6.0
L-3 Communications Holdings (NYSE:LLL) $73.03 $69.56 8.3
Corinthian Colleges (Nasdaq:COCO) $9.84 $8.62 4.9
Data as of market close July 27, 2010


An Undervalued Education?
Corinthian Colleges, an operator of for-profit post-secondary institutions in the United States and Canada, provides an excellent example of this situation. Operating in a stable, well-developed industry, the company has seen operating revenues consistently increase over the past three years, rising from $933.2 million for its 2007 fiscal year (ended June, 2007), to $1.31 billion for 2009. With analyst consensus estimates pegging the company's revenues to tally $1.76 billion during 2010 and grow to $2.03 billion by 2011, Corinthian's top line definitely looks to be in solid shape.

Switching focus to the bottom-line, the stock's net income has steadily increased as well, rising from a paltry $7.2 million in 2007 to $68.8 million for 2009. Yet despite this solid performance, the stock has been consistently sold off over the past year, and has recently been shredded by the market. It tumbled from the $19 range as recently as mid-April, and currently trades in the $9.60 range after hitting rock bottom at $8.62 in early July. (Learn more about sell-offs, see Sympathy Sell-Off: An Investor's Guide.)

On an earnings-per-share basis, this sell-off appears to have created an opportunity for investors to snap up COCO shares while they are temporarily undervalued. For 2009, Corinthian generated an EPS of 85 cents, while analysts expect it to generate between $1.64 and $1.70 worth of EPS for 2010, with a further increase to $1.98 expected for 2011. Any way you slice it, those numbers make the stock dirt cheap on a P/E basis, and its recent slide appears to be a case of market pessimism taken too far. In other words, Corinthian Colleges could very well be a laggard poised to turn into a leader.


The Bottom Line
The stock market is a counterintuitive and unpredictable place, in which all too often following last year's winners can turn your portfolio into a real loser. Sticking your neck out and making bets on stocks that have been driven down too far in price can be a great way to catch some of the next batch of winners before their success leads to overvaluation. In the case of Corinthian Colleges, one has to wonder if the market isn't once again offering a real-time lesson in which last year's laggards becoming this year's leaders.

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