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Look for leaders among laggards

October 14, 2013: 10:45 AM ET
Some well-known blue chip stocks are crawling along at a snail's pace. But they are bound to redeem themselves.

Some well-known blue chip stocks are crawling along at a snail's pace. But they are bound to redeem themselves.

This article was published in the October issue of Money magazine.

Searching for stocks that are likely to thrive in 2014? If recent history is a guide, one place to look is among shares that are badly lagging the S&P 500 this year.

Best Buy (BBY) and Hewlett-Packard (HPQ), after all, are soaring after being among the biggest losers last year. (Full disclosure: I recommended dumping HP in the January/February issue.) In 2012, Bank of America (BAC) and AIG (AIG) were on top, after being also-rans in 2011.

Of course, not all laggards become leaders -- see J.C. Penney (JCP). The key is "to look for stocks that haven't done as well, figure out why, and have the patience and conviction to hold," says Bob Phillips, managing principal at Spectrum Management Group.

Here are two iconic businesses with the potential to turn things around fairly soon:

Drill for value

Shares of energy giant Exxon Mobil (XOM) have performed well over the past decade, but not this year. Why? Investors have shunned big oil in favor of smaller firms directly tied to the shale gas boom, such as EQT (EQT), which is up more than 50% this year.

Watch:  J.C. Penney not dead yet

But Mike Binger, senior portfolio manager at Gradient Investments, says Exxon has been unfairly overlooked. True, the energy giant's profit margins have shrunk lately, thanks in part to still historically low natural-gas prices, brought about by the shale boom. Yet there are several potential catalysts to reenergize shares of the country's biggest oil company: For starters, the recent rise in crude prices, now firmly above $100 a barrel. Plus the improved outlook for Europe, which is finally out of recession. That should only help Exxon, which derives 70% of its petroleum sales from the U.S. and Europe.

Exxon also trades at a price/earnings ratio of just 11, based on next year's estimated earnings, so the downside is limited.

Steel your portfolio 

While Exxon is being hurt by the shale boom, U.S. Steel (X) may not be getting enough credit for it. Growing shale gas exploration has led to increased demand for tubular steel. Lately that hasn't translated into profits for the nation's second-biggest steel company, thanks to competition from cheap imports. That could change soon, though.

Related: Picking the best stocks for your portfolio

Eric Marshall, manager of the Hodges Small Cap Fund (HPDSX), says the rebound in Europe should lead to a stronger euro, which will make European steel and iron ore less competitive. And while the fact that China isn't growing as fast as forecasters expected is a concern for the industry as a whole, U.S. Steel isn't directly affected, since it does not sell into Asia or the emerging markets.

Analysts expect U.S. Steel to return to profitability by 2014. "The biggest gains made in cyclical companies is when they go from losing to making money," Marshall says. It's a risky contrarian bet. But those tend to be the ones that really pay off.

Send a letter to the editor about this story to money_letters@moneymail.com.

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