Can These Winners Keep Up the Pace?

With the first quarter of 2012 in the books, the news has been good for most investors. But inevitably, you have to look to the future and ask yourself: Do the stocks that performed so well in the first three months of the year have more room to run -- or are they setting themselves up for a big plunge?

Of course, a single quarter isn't long enough to draw any really strong conclusions. But by taking a look at which sectors of the market performed best in the first quarter, you can hope to get at least some insight into what could be coming down the road for these stocks.

To find the biggest gains, you can really focus on just two industries: financials and tech stocks. Both of those groups jumped more than 20% for the quarter, well exceeding the third-place consumer discretionary stocks.

But once you look beyond quarterly performance, the similarities between these two sectors quickly disappear. In many ways, the two groups couldn't be more different in terms of where they've been and what their future prospects look like.

For financial stocks, the first quarter marked a much-needed reprieve from a horrible 2011. The sector was the worst performer last year, losing 17% in a flat year overall for the S&P 500 index. Even the relatively strong banks gave up plenty of ground, with Wells Fargo (NYS: WFC) falling 10% and JPMorgan Chase losing nearly 20% in 2011.

But several things have gone right for banks this quarter to turn things around. The mortgage foreclosure settlement was an expensive but welcome resolution to what could have been a long-term overhang on the industry and could finally allow mortgage-lending banks to clean up their balance sheets and get unwanted assets through the foreclosure process and off the books. In addition, results of the Fed's stress tests were largely positive, with even last year's big loser, Bank of America (NYS: BAC) , managing to pass the most recent tests. Overall, the advance for financials was broad-based, with all 25 of the top financial stocks in the SPDR Select index for the industry showing year-to-date gains as of yesterday.

Looking ahead, though, the future is far more uncertain. Despite assurances to keep rates low through mid-2014, the Fed is starting to give indications that low rates and easy monetary policy won't last forever. For banks like Wells Fargo and JPMorgan that are on a relatively firm footing, it shouldn't be hard to adapt to more normal conditions. But for more marginal banks like B of A, it's essential to make the most of these favorable times before they disappear. Until that situation resolves itself, the gains that banks have earned so far this year may be difficult to duplicate.

On the other hand, last quarter's rise in tech stocks merely continued a long trend. Over the past three years, technology has put in the second-best performance of any sector.

But what's clear here is that you can't just throw darts and pick a winning tech stock. Apple (NAS: AAPL) certainly isn't the only tech stock posting strong gains, but a 50%+ rise from the stock with the largest market cap in the nation certainly helps the overall results for the sector. But in stark contrast, search giant Google only managed to break even, and both Hewlett-Packard (NYS: HPQ) and Yahoo! have posted losses for the year so far.

The reason for the disparity is in the nature of what's supporting tech stocks. For banks, it's the macroeconomic environment that's supporting all the players. But in tech, there are clear winners and losers. As Apple and Google take over the smartphone business, Research In Motion (NAS: RIMM) is left to suffer defeat as many question its ability even to stay competitive -- a far cry from its once-dominant position in the market. HP's woes stem from a failure to identify changing conditions and modify its strategy. Even Dell, which has suffered from many of the same adverse trends that HP has faced, has managed to take steps to modernize and get exposure to up-and-coming niches -- albeit somewhat late to the game.

Looking forward, there's little reason to expect the tug-of-war among tech companies to end. Overall, new gadgets are attracting revenue, but you have to pick carefully to make sure you don't miss out.

As compelling as a particular sector may look, the real question is whether individual companies within that sector can make the most of the circumstances they face. If you can identify which stocks are best aligned with coming trends, you'll do well regardless of how their less adroit competitors perform.

For more on these sectors, check out the Fool's latest special reports. "The Next Trillion-Dollar Revolution" focuses on one stock poised to dominate the mobile industry, while our banking report identifies stocks that only the smartest investors are buying. Take a look at either or both and get the insight you need to pick and stick with winners.

At the time this article was published Fool contributor Dan Caplinger loves to try to keep up the pace. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Apple, Yahoo!, Google, Wells Fargo, JPMorgan Chase, and Bank of America, and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo, Yahoo!, Google, and Apple, as well as writing covered calls on Dell and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy makes you a winner.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story