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By JONNELLE MARTE

When stock markets began to whipsaw this summer, Tony Zabiegala decided to take some money out of stocks. The Cleveland-based adviser reduced most of his clients’ equity exposure, getting down to just 10% for the most risk-averse. But while it seemed like the right move through the ups and downs of August and September, when stocks rallied in October, Zabiegala and his clients mostly missed out. “We didn’t see it coming,” says Zabiegala.
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He’s not alone. Picking winners during the past few months of uncertainty has proven difficult for most investors — even the pros. While stocks are up 5% for the year, they’ve had an unsettling climb. Many investors have fled stocks for bonds, only to find that most bond yields are sinking and most bond fund managers are trailing their benchmarks thanks to bad bets on riskier issues. Even investments that are supposed to zig when the market zags, like oil and gold, have been moving much closer with stocks, making it difficult for investors to figure out the next step. “Many investors are looking around for ways to hedge their portfolios risks,” says Christine Benz, director of personal finance for Morningstar. “Some of those bets have not been particularly profitable so far.”

Of course, some of these bets will eventually pay off, say financial advisers. Many are telling clients to sit tight through this rocky market — and for good reason: Study after study has shown that most investors can’t accurately time the market’s ups and downs; they buy high and sell low. Inertia, on the other hand, is often rewarded: An investor who invested in the S&P 500 in March 2009 is currently up about 95%, including dividend payments, says Andrew Goldberg, market strategist for J.P. Morgan Funds.

That said, there are some investments financial advisers recommend dumping or scaling back on or avoiding if you don’t already own. Some have already seen their best days; others simply don’t provide strong enough returns to offset their high costs. Below are four investments advisers say you should think twice about before owning.
Closet Index Funds

With stock market gains inconsistent, advisers say finding a low cost mutual fund that won’t erode your returns in fees is extra important. Few investors who go the active route are seeing the benefits: the average actively managed large blend fund is under performing the S&P 500 index so far this year by 3 percentage points, according to Morningstar. Many investors might be better off in a low-cost index fund that will at least match the index, says Benz. The cost of fees adds up dramatically: paying the average 1.04% fee on an no-load actively managed large blend fund instead of the 0.18% fee on the Vanguard Total Stock Market Index fund (VTSMX) can cost you an additional $3,000 over 20 years, according to Morningstar.

Some funds are even more expensive and often simply move in line with their benchmark index, says Diane Pearson, an adviser with Legend Financial Ad visors. Take the $1.8 billion Lego Mason Clear Bridge Fundamental All Cap Value fund (SHFVX), which tends to move in line with the S&P 500 index but has lagged it by an average of more than 2 percentage points a year for the past five years. In addition, the fund charges 1.32%, compared to the average 1.14% for other large cap front load funds, according to Morningstar. Legg Mason declined to comment.

Of course, advisers say there are some smart managers worth the higher fees. But many say it’s best to save active management — and the higher costs that come with it — for asset classes like fixed income or small cap stocks where it takes more work to determine value and an analyst digging for smart picks can really add a bonus. “You don’t want to pay 1.7% on a fund that tracks the S&P 500,”says Pearson.
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By JACK HOUGH

U.S. stocks have rallied fiercely since Thanksgiving, but the S&P 500 index is still 8% below its 2011 high, reached in May. The stocks listed below have done better. On Monday, they all hit new highs for the year.
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That doesn’t make these stocks expensive. In fact, they turned up in a search among large, mid-size and small U.S. companies for stocks that were both hitting new 2011 highs and selling for less than the S&P 500′s price of 13 times forecast earnings.

Value investors can think of these three as modestly priced shares that happen to have gained of late. Momentum traders can think of them as recent risers that happen to still be cheap.
Humana

2011 Price-to-Earnings Ratio: 10

Humana (HUM: 86.20, -0.36, -0.42%) is the largest publicly traded health benefits company, with yearly revenues of more than $36 billion. It’s also one of the largest providers of Medicare Advantage plans, whereby Medicare patients opt for service from private companies rather than the government. The recent failure of a congressional “super-committee” to achieve targeted budget cuts triggered automatic cuts to Medicare spending in future years.

But David Windley, who covers Humana stock for investment bank Jefferies & Company, called looming cuts “relative child’s play” in a note last month to clients. Humana has survived worse threats to its bottom line in recent years, according to Windley, and the outlook in Washington, D.C., offers “more certainty now than in the last five years.” Medicare Advantage is “increasingly viewed by friend not foe” by policymakers looking for savings. Humana’s goal is to run its Medicare Advantage plans at a 15% savings to Medicare, with the extra funds used to reduce premiums and add benefits (thereby luring customers) and to bolster profits (thereby offsetting budget cuts).

The company has beaten earnings estimates by more than 30% in each of its past two quarters.
Lithia Motors

2011 P/E Ratio: 13

Lithia Motors (LAD: 23.30, -0.21, -0.89%) operates 86 U.S. dealerships in 11 states where it sells 28 new car brands and a variety of used car brands. Its stock was nearly totalled by the financial crisis of 2008 and 2009, plunging to $2 and change. Since then it has recovered to more than $24. U.S. light vehicle sales hit a 27-year low of 10.4 million units in 2009, but have since rebounded and are on pace for 12.8 million this year. Analysts project sales of 13.5 million light vehicles next year.

Lithia’s earnings per share are expected to double this year on a 26% increase in revenues. Last quarter the company bought two dealerships and sold one, reduced expenses as a percentage of gross profit, bought back shares and paid a dividend. It also projected that sales at longstanding stores would increase 9% next year.
Macy’s

2011 P/E Ratio: 12

Macy’s (M: 32.76, -0.19, -0.58%) November sales at longstanding stores increased 4.8% from a year earlier, beating Wall Street’s 4.1% forecast. The company, with 850 stores under the Macy’s and Bloomingdale’s names, cashed in on general strength in Christmas shopping. Consumers spent 16% more on Thanksgiving weekend than a year earlier, according to the National Retail Federation. Macy’s also reported a 50% jump in online sales.

Kenneth Stumphauzer, who covers the stock for Sterne Agee, an investment bank, wrote in a note to clients that Macy’s is set up for a strong December, too. November was the most difficult comparison month for the year, he wrote, and an unseasonably warm Black Friday might have cut into sales of cold-weather clothing. Those sales should shift forward, he reckons, helping December’s numbers. And compared with last year, December this year gets an extra shopping day before Christmas.

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3 Cheap Stocks Hitting 2011 Highs