Stock-picking trumped buy-and-hold in the past decade, reversing the reigning investment strategy proffered by the likes of Vanguard Group and other mutual-fund firms that encouraged Americans to pile into passively managed index funds and those that closely follow benchmarks.
Investors who smartly selected stocks from broader indices, such as S&P 500 index constituents Apple , Coach and Cliffs Natural Resources, generated gains of up to 5,000 per cent.
The S&P 500, in contrast, dropped nine per cent since December 2000, undermined by two recessions and two bear markets at each end of the decade.
Yet, not every money manager is prepared to read the eulogy for buy-and-hold.
"Stock-picking is always important because there will always be a stock du jour, a stock of the year, and a stock of the decade," says Jay Suskind, senior vice president at Duncan-Williams Investment Bankers. "But I wouldn't get too wrapped up in 'buy-and-hold is dead.' The S&P is down for the decade, but that's over a 10-year period. There were times where you made a lot of money."
Even though the S&P 500 index of the largest U.S. stocks managed to beat three-quarters of active managed mutual funds over the past decade, some companies rallied 50-fold.
That's even more remarkable considering that, between 2001 and 2010, there was no shortage of negative news.
After Federal Reserve Chairman Alan Greenspan had raised interest rates several times to cool the U.S. economy, the dot-com bubble burst in early 2000. The real collapse wasn't felt until 2001, and losses accelerated after the terrorist attacks on Sept. 11.
"Part of the tech bubble was also a mega-cap stock bubble," says Bill Stone, chief investment strategist with PNC Wealth Management. "On top of technology, media and telecom, a lot of the weakness was in large-caps. If you look at stock indices that follow smaller market capitalization stocks over the last decade, they did significantly better."
Technology, media and telecommunications stocks are among the worst performers on the S&P 500 over the past ten years. They include JDS Uniphase, Tellabs, Qwest Communications, Sprint-Nextel , The New York Times and Gannett.
Each of those stocks plummeted by 75 per cent or more. Not long after the dot-com bubble burst, accounting scandals and bankruptcies at Enron and Worldcom further eroded investor trust. Still, each was eclipsed in September 2008 by Lehman Brothers, which came at the height of the financial crisis of 2008.
Lehman, the No. 4 U.S. investment bank at the time of its implosion with $639 billion (U.S.) in assets, was founded by German immigrant Henry Lehman in Montgomery, Ala., in 1844 as a general store. Lehman's collapse toppled global markets as credit dried up worldwide.
As a result, several financial stocks are among the worst S&P 500 performers of the past decade. American International Group , Citigroup , Morgan Stanley and E*Trade Financial have lost 66 per cent or more over the past 10 years.
Citigroup was downgraded to a penny stock in March 2009. To be sure, there was positive news for bullish investors in the past ten years. Before the height of the subprime-mortgage crisis, the Dow Jones Industrial Average hit an intraday record high of 14,198.10 on Oct. 11, 2007.
The emergence of countries like Brazil, China and India contributed to a massive increase in commodity prices, which has paid off for investors in precious metals, rice, corn and wheat futures, and oil. As if the past decade wasn't eventful enough, professional money managers expect a tumultuous start to the new decade in 2011, as the global markets face the threat of debt crises in countries such as Portugal and Italy. Intervention by the Federal Reserve has kept interest rates and the dollar depressed, although bond prices have been falling recently.
One of Duncan-Williams Investment Bankers' Suskind's best for 2011 and beyond is large-cap "quality" stocks.
"Buy the old quality, dividend-paying names and you'll probably do OK," he says. "Boring is better." PNC's Stone agrees that it's "about time to see a large-cap comeback. There are opportunities there. It's a strange fact that some of the cheapest stocks valuation-wise are also some of the biggest and strongest ones."
But before looking for stock-picking opportunities that will pay off in the next ten years, a look back at the big winners of the past decade is instructive. Here are the 10 best S&P 500 constituents since Dec. 31, 2000, according to data provided by Capital IQ. They are ranked in reverse order by share-price appreciation.
10. Intuitive Surgical
10-Year Gain: 1,429%
Company Profile: Sunnyvale, Calif.-based Intuitive Surgical designs, manufactures and markets the da Vinci Surgical Systems, a robot-assisted surgical device that enables surgeons to perform complex procedures, such as open-heart surgery, through one-to-two centimeter incisions.
Analyst Ratings: Intuitive Surgical receives strong grades from analysts. Of the 15 researchers covering the stock, seven recommend the stock as a "buy" and the other eight say investors should hold onto shares.
Major Events: Shares of Intuitive Surgical finished at $17 at the end of 2000 and rallied to an all-time high of $394 earlier this year. The company launched its initial public offering in 2000, right as its da Vinci Surgical System became the first robotic surgical system cleared by the FDA for general laparoscopic surgery. Litigation between Intuitive Surgical and principal competitor Computer Motion held back shares of the company until a 2003 merger between the two providers of robotic-assisted surgical systems.
In following years, the FDA approved the da Vinci Surgical System for thoracoscopic surgery, for cardiac procedures performed with adjunctive incisions, urologic and gynecologic procedures.
Upside Potential: Analysts have an average price target of $322, which implies that shares can rise 24% from where they currently trade at $260.
9. Coach 10-Year Gain: 1,497%
Company Profile: Coach is a well-known luxury name for leatherwear in the U.S. The New York-based company's product offerings include handbags, women's and men's accessories, footwear, business cases, jewelry, travel bags, fragrance and watches.
Analyst Ratings: Like its handbags and leather gloves, Coach shares are in high demand with analysts. Thirteen of the 17 researchers covering the stock rate Coach a "buy." The rest say investors should hold onto shares.
Major Events: A decade ago, one share of Coach could be purchased for $3. Most items in Coach's retail stores are priced 50 times higher. Until 2000, Sara Lee owned Coach before launching an IPO to sell a 17% stake in the company. A year later, Sara Lee spun off its remaining interest in Coach.
The company has continued to open retail and boutique stores over the past decade. Coach operates more than 400 stores in the U.S. and Canada and Coach boutiques located within select department stores and specialty retailers across the U.S. Coach has also made strides in the Asia-Pacific region, forming Coach Japan as a joint venture with Sumitomo in 2001 before gaining 100% ownership in 2005. The company also bought the Coach domestic retail businesses in Hong Kong, Macau and mainland China from its former distributor in 2009.
Upside Potential: Coach shares may wind up at $57.67, according to the average analyst price target, below the stock's current price of $57.96.
10-Year Gain: 1,653%
Company Profile: CarMax is primarily known as a used-car retailer in the U.S., but the company also has franchise agreements to sell new vehicles by Chrysler, Nissan, Toyota and General Motors.
Analyst Ratings: Of the 13 analysts covering CarMax, not one has a "sell" rating on shares. Nine researchers say investors should hold shares, while another four suggest buying the stock.
Major Events: Before 2001, shares of CarMax traded below the $2 mark as it was still under the ownership of the now-defunct electronics retailer Circuit City. CarMax was separated from Circuit City in 2002 and has seen sharp price appreciation during a time that most automobile-related companies have been hit hard.
CarMax claims the title of the nation's largest retailer of used cars, based on the 357,129 used vehicles retailed during the fiscal year ended Feb. 28, 2010. CarMax operates 100 used car superstores as of the end of fiscal 2010.
Upside Potential: Analysts have an average price target of $31.56 for CarMax shares, which is below the current price level of $34.67.
7. Cognizant Technology Solutions
10-Year Gain: 2,223%
Company Profile: Cognizant Technology provides custom information-technology consulting and technology services as well as outsourcing services for companies located in North America, Europe and Asia.
Analyst Ratings: Eighteen analysts have a "buy" rating on Cognizant shares and another two say investors should hold onto the stock. No research firm has a "sell" rating on Cognizant.
Major Events: Cognizant didn't join the S&P 500 until November 2006, but it has consistently been named one of the fastest-growing companies by Fortune, Business Week and Forbes. Cognizant has taken what it calls a "vertical focus" by organizing its business into four segments, including financial services, health care, manufacturing and retail, and communications and media. In 2003, Cognizant became a fully independent company after IMS Health, which owned a 56% stake in the company, announced a "split-off" exchange.
Upside Potential: On average, analysts are looking for Cognizant shares to rise only 3.5% from where they currently trade to $72.22.
6. Southwestern Energy
10-Year Gain: 2,648%
Company Profile: Southwestern Energy is an independent energy company, which through its subsidiaries, is engaged in the exploration, development and production of natural gas and crude oil within the U.S.
Analyst Ratings: Of the 26 research firms with coverage of Southwestern Energy, only one analyst has a "sell" rating on the stock. Seventeen other analysts have a "buy" rating and eight suggest that investors hold onto shares.
Major Events: Formerly known as Arkansas Western, the company began the last decade drilling for natural gas in the overlooked Overton Field in East Texas. In 2003, Southwestern Energy began investing in the new Fayetteville Shale play, beginning production from the area in 2004. In 2008, Southwestern Energy sells Arkansas Western Gas in order to focus on the exploration and production of natural gas.
Upside Potential: Analysts continue to believe Southwestern Energy shares can climb, as a price target of $45 implies 26% upside.
5. Cliffs Natural Resources
10-Year Gain: 2,657%
Company Profile: Cliffs Natural Resources mines iron ore.
Analyst Ratings: Nine researchers have a "buy" rating on Cliffs Natural Resources and another four rate the stock a "hold." No research firm covering the stock has a "sell" rating.
Major Events: Founded in 1847 as the Cleveland Iron Mining Co., Cliffs Natural Resources had a rollercoaster decade due to the effect of recessions on the iron-ore industry. Following the recession at the start of the decade, President George W. Bush placed a temporary tariff on imported steel, which helped domestic companies. The emergence of China in the global economy brought good fortune on iron-ore companies. In the U.S., Cliffs has six iron-ore mines in Michigan, Minnesota and Eastern Canada, and six coal mines in West Virginia and Alabama. The company now has business units in the Asia-Pacific region, Latin America and Brazil. The company changed its name from Cleveland-Cliffs to Cliffs Natural Resources in 2008.
Upside Potential: Analysts have an average price target of $85.40 for Cliffs shares, which implies a 12% gain.
4. Urban Outfitters
10-Year Gain: 3,649%
Company Profile: Urban Outfitters is the Philadelphia-based apparel retailer that targets young adults aged 18 to 30. The company operates under the Urban Outfitters, Anthropologie, Free People and Terrain brands.
Analyst Ratings: One of 26 analysts covering Urban Outfitters has a "sell" rating, while another eight have a "hold" rating. The remaining 17 researchers suggest that investors buy shares of the retailer.
Major Events: The company's operations grew throughout the decade but without any major incident. Urban Outfitters has increased its store count annually, and net sales nearly doubled from fiscal 2006 to fiscal 2010. However, the retailer's hip fashion items and products have generated some minor controversy over the past decade, including the "Jesus Dress Up" game that the company no longer markets.
Upside Potential: After a breakout move over the past decade, analysts don't see much upside left in Urban Outfitters. An average price target of $39.48 would mean another 7.3% increase in the retailer stock.
3. FLIR Systems
10-Year Gain: 3,922%
Company Profile: FLIR Systems designs, manufactures and markets thermal-imaging systems, which are used for military and defense, police and security professionals, and building diagnostics.
Analyst Ratings: Only one analyst has a "sell" rating on FLIR Systems. Seven others say investors should buy the stock, while five research recommending holding onto shares.
Major Events: FLIR Systems was hit at the start of the decade with an accounting scandal. In 2002, the Securities and Exchange Commission alleged that former FLIR CEO Kenneth Stringer and other executives engaged in fraudulent accounting practices throughout 1998 and 1999 in order to meet revenue and earnings projections. FLIR restated its 1998 and 1999 financial statements three times in 2000 and 2001 to correct its financials. In 2007, FLIR would again restate financial statements, this time for a 10-year period from 1995 through 2005, to properly record charges for compensation expense relating to past stock option grants.
On the positive side: Since 2003, FLIR has made a total of 11 acquisitions, and revenue and net earnings have more than doubled from 2005 to 2009.
Upside Potential: FLIR's nearly 4,000% surge may appear to be running out of steam, but analysts still think investors can squeeze out more profits. An average price target of $32 represents 16% upside potential.
10-Year Gain: 4,210%
Company Profile: Led by CEO Steve Jobs, Apple has been one of the hottest stocks of the decade, thanks to its innovative products like the iPod, iPhone and iPad. The company is also highly regarded for its Mac line of computers and the iOS software platform.
Analyst Ratings: Apple is among the most-loved stocks on Wall Street, garnering a whopping 59 "buy" recommendations from research firms. Three analysts rate the stock a "hold," while no researcher covering the stock recommends that investors sell shares.
Major Events: Apple's incredible run began in 2001 with the introduction of the iPod portable MP3 player. That same year, Apple opened its first retail store.
The company continued to update its iPod and Mac computer lineups through 2007, when the company changed its name from Apple Computer to Apple Inc. to reflect its broadening focus. That same year, Apple unveiled the first iteration of the iPhone, followed in 2010 by the introduction of the iPad.
Apple hasn't been without controversy over the past decade. An options-backdating scandal surfaced after Jobs was granted stock options for 7.5 million shares in 2001. In addition, Jobs' health became a major concern from 2006 until 2008, with investors questioning whether his health was a private matter or public concern for shareholders.
Upside Potential: Apple shares won't suffer from fatigue in 2011 if analysts are correct. An average price target of $379 on Apple shares implies another 18 per cent climb from current trading levels.
10-Year Gain: 5,232%
Company Profile: Known for its recent run of advertisements featuring Star Trek's William Shatner, Priceline.com is the online travel company offering its customers a range of travel services, including hotel rooms, car rentals, airline tickets, vacation packages, cruises and destination services.
Analyst Ratings: Thirteen analysts rate Priceline.com a "buy" and another four say investors should hold shares. No research firm has a "sell" rating on the stock.
Major Events: Priceline.com, launched in 1998, expanded operations over the past decade to include the brands Booking.com worldwide and Agoda in Asia.
The company's "Name Your Own Price" service model has benefitted travelers and shareholders alike. In June 2007, Priceline.com eliminated processing fees for price-disclosed airline-ticket service, and a year later, it reduced processing fees for domestic price-disclosed merchant hotel room service. Both moves gave the company a temporary pricing advantage over competitors like Expedia and Orbitz .
Total revenue and net income has more than doubled from 2005 to 2009, according to Priceline.com's annual report.
Upside Potential: Priceline.com shares have had an absolutely remarkable run over the past 10 years, but there still may be upside potential for investors who missed out. Analysts have an average price target of $464, which implies another 15% increase in the stock.