3 Investments That Could Rally in 2011

By Jonas Elmerraji

BALTIMORE (Stockpickr) -- 2010 is nearly behind us -- and what a year it's been. While the broad market's double-digit run-up has been nothing to scoff at, it's paled in comparison with the massive rallies that have taken place across specific industries and other asset classes.

Defense contractors are up nearly twice as much as the broad market this year; small-caps have rallied even more than that; and precious metal funds are up more than four times as much as the S&P in 2010.

But focused investing in those plays is easy when you have the benefit of hindsight. Instead, today we'll look at investments to focus on for 2011. With a new year just a few trading days away, a handful of industries stand out as attractive investments for 2011.

Here's a look at why you should be paying attention to these three investments in the coming year -- and how you can put these plays to work for your own portfolio.

1. Precious Metals

I mentioned earlier that precious metals funds are up more than four times as much as the market in 2010, and while that's an impressive bit of outperformance, there's little reason to believe that the trend is ending anytime soon. While equities took center stage earlier in the year, it was only during the second half of 2010 that hard commodities like precious metals really shined (no pun intended).

That's thanks in large part to another flight to quality that took hold as volatility ticked up around the beginning of the summer. But the commodity buying didn't let up when volatility (as measured by the VIX S&P 500 Volatility Index) tapered off just a couple months later. That's an attractive setup for contrarian investors right now, because it means that metals have supported their higher prices despite increased equity buying.

The easiest way to get exposure to metals is through ETFs like the SPDR Gold Trust or the iShares Silver Trust, each of which has a share price that corresponds to physical holdings of their respective metal, not just financial instruments that mirror gold or silver's movement.

For fundamentals-based investors, silver looks especially attractive right now. Significant amounts of silver are used in industrial processes, much of which can never be recovered. As a result, the amount of silver supply destroyed often outpaces production each year -- and despite that fact, silver sits at historically low discounts to gold (which doesn't have the same level of industrial demand).

Another viable option is in miners of the metals. Miners have prices that typically move in concert with the metal they mine, but they have the added speculative angle of potentially discovering large properties. That's an added factor that's made plays like Yamana Gold and Barrick especially attractive to investors seeking a higher risk/reward tradeoff for their portfolios. If you're new to mining plays, sticking with mature companies that own proven producing mines is a smart way to go for 2011.

2. Retailers

Consumer spending has been a major theme for Main Street investors ever since 2008. After all, discretionary consumer dollars are a major engine for economic growth. And now, with consumer spending on the upswing, U.S. retailers look to be the biggest beneficiaries.

Most attractive are the mid- to high-end aspirational brands that took the hardest hits in 2008. While these aren't value plays -- most of these stocks have fully rebounded from their lows -- they do offer substantial growth prospects as shoppers become all the more willing to part with their cash. And with holiday-season sales still a few months from being reported to Wall Street, now could be the ideal time to pile up on these plays for 2011.

Among these stocks, Abercrombie & Fitch could sport one of the most springy prices. While ANF showed shareholders some horrific top-line declines in the midst of the credit crunch, the apparel company still boasts robust margins (the result of industry-high sale prices) and has been the subject of increasing analyst attention each quarter -- two factors that should spur buying.

Coach is another retail fashion stock that boasts high margins and exposure to a hard-to-crack niche. Unlike ANF, though, and much to many analysts' surprise, Coach actually fared relatively well during the recession. The company's bets on international growth are especially attractive right now as burgeoning numbers of middle-class consumers in emerging markets take to their malls to pick up attainable status symbols.

Investors looking for more stability should turn to Gap for a similarly positioned, if much less volatile play.

3. Tech Stocks

Investors in innovative technologies have always been well rewarded -- even in tentative economic conditions. But the tech sectorhasn't been able to shake the image of risk that's stuck with it since the dot-com bubble burst. A decade later, successful technology stocks are continuing to perform well, but they're investments that need to be predicated on more than just a good idea.

An easily monetized business model and the ability to raise capital in the market will continue to be two key attributes to look out for 2011's tech investors. While these stocks won't come cheap, expect upside in this sector at the hands of revenue growth.

Large-cap, mature tech firms such as Apple and Google should continue to be perennial performers. With "Wall Street Darling" status, massive scale, and significant cachet with the public, these two companies are well positioned for success. Of the two, Google could be an especially interesting investment case for 2011 thanks to the relative sluggishness of shares in 2010; the company currently trades for a historically low price-to-earnings ratio, and a smaller premium to book value than its tech sector peers.

That said, Google will need to slow the pace of acquisitions that aren't accretive to revenues if it wants to continue to look attractive.

For more stocks that could make good plays for next year, check out the 2011 Rally Stocks portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.


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