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.

In Pictures: 10 Tips For Choosing An Online Broker

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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  7. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  8. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  9. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  10. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center