The top 10 best-performing stocks of 2021 include an electric automaker, but it's not the one you think

"Why is a company among the better performers? You can't always assume it's the result of a new trend."

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The end of a year and the start of a new one brings with it a litany of top-ten lists, from music charts and movie box office numbers to more subjective offerings like the New Yorker's best feel-good and feel-bad TV of 2021.

These lists can provide some context or perspective heading into the new year, but rarely do they feel like a call to action, except to suggest that you need to watch Netflix's deranged sketch comedy "I Think You Should Leave." OK, definitely catch up on "Succession" too.

But when it comes to seeing which stocks performed best over the past calendar year, investors looking to adjust their portfolio face an obvious question. Do I avoid these stocks on the basis of wanting to buy low and sell high? Or do I buy them thinking they can continue on their upward trajectory?

In general, the latter approach makes more sense, says Sam Stovall, Chief Investment Strategist at CFRA. "From a momentum perspective, you'd rather own last year's winners than last year's losers, because there tends to be a lot of overhead resistance for the laggards that has to be worked out before they can move higher," he says.

Investing legend Peter Lynch, who routinely trounced the S&P as manager of Fidelity Magellan from 1977 to 1990, would concur, Stovall adds. "Peter Lynch said that people were generally too quick to sell winners and too slow to unload losers. They let a 2- or 3-bagger go when it could become a 5- or 10-bagger."

That isn't to say that you ought go out and snap up all 10 of 2021's best finishers. But understanding why certain stocks were winners can help inform a successful investing strategy going forward.

As in every year, 2021's list included shoo-ins and surprises. Anyone following meme-stock mania wouldn't be shocked to see GameStop leading the way. But even people who watch markets closely likely didn't expect Ford to crack the list on the strength of its electric vehicle business, supplanting 2020's top performer, Tesla, in the process.

Read on for the rest of the top 10 stocks of 2021, and how looking at winners can make you a better investor.

The top 10 performing stocks of 2021

The Grow team used FactSet data to find the 10 stocks in the Russell 1000 — an index that tracks the 1,000 largest companies in the U.S. stock market — which posted the highest returns in 2021.

Each company cracked the list for its own specific reasons, but the stocks can be grouped into a few categories.

  • Rising prices beneficiaries: Three companies involved in oil and natural gas exploration and production turned in excellent returns in 2021. Because Devon Energy, Continental Resources, and Marathon Oil are "upstream" energy companies — ones involved in the earliest parts of the energy production process — they were among the firms that enjoyed the biggest benefits of rising crude oil prices.

    Industrial giant Alcoa had a great year too, thanks largely to rising aluminum prices.
  • Firms in trendy businesses: A few companies on the list are involved in what market-watchers have identified as businesses that are set to rapidly expand in the coming years. These include Upstart Holdings, which uses AI to determine creditworthiness among people seeking consumer loans; Fortinet, which makes cybersecurity technology; and Ford, which has earned investor confidence with a new electric vehicle initiative.
  • Gamestop: The top performer of the year is very much its own thing. A so-called meme stock, Gamestop's stock price is buoyed by online traders who forced a "short-squeeze" early in 2021 and have continued to buy and hold shares.

    If you held on the whole time, it was a wild ride. The shares, which began the year trading in the teens, shot as high as $325 in January, dipped down to $41 in February, and ended the year at $148 per share.

What you can learn from past stock-market winners

The first thing to consider when examining winning stocks is their recipe for success, says Stovall. "Why is a company among the better performers? You can't always assume it's the result of a new trend, and will go higher and higher," he says.

"In Gamestop's case, what's causing it go up? Meme investors. As a result, it's hard to know if it will go up. It might tank."

You may find that you have reason to believe a particular stock or a group of companies can keep running hot. You may, for instance, believe that upstream energy firms will continue to do well based on projections among Wall Street analysts that crude oil prices will rise in 2022.

Or maybe you believe a projected rise in interest rates will benefit banks and continue to be bullish on 2021 winner Signature Bank.

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That's where your homework on the companies needs to begin, offers Stovall. "Examine the projected earnings of a company to see if its multiple is justified," he says, referring to a company's P/E ratio — a measure of whether or not a company is trading at an attractive valuation.

"Compare it with peers. Is it trading in the same range, or is it grossly out of whack? Go to your brokerage website and see what Wall Street analysts are saying about the stock."

You're trying to give yourself as much information as possible to make informed decisions, says Stovall. "Better performers are going to get more attention," he says. "You need to decide if they deserved that attention and if they deserve additional attention."

Stay diversified

No matter how you feel about a particular company or segment of the stock market, you'd be unwise to go all in on a few names, financial experts say. That's because, no matter how you feel about an investment, it always has the potential to lose money — and that could cause major pain in your portfolio if you're overexposed to that investment.

To avoid overexposure, experts recommend a "core and satellite" approach in which you build a broadly diversified "core" portfolio with the vast majority of your assets and use a smaller portfolio to tweak your allocations or explore investing ideas.

It's important to understand the composition of your core before you make any tweaks in your satellite. Say, for instance, you wanted to bet on energy. If your core portfolio was invested in a fund that tracked the S&P 500, you'd have less than a 3% exposure to energy stocks.

"If you wanted to overweight that area of the market, then, you might add five percentage points to that holding," Stovall says.

How you boost your holding depends on your tolerance for risk and your conviction in your investment decisions, he adds. "If an investor is a big risk-taker, they may feel comfortable investing in individual stocks," he says. "If you're less of a risk taker, you may want to buy an ETF that gives you exposure to the entire sector."

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