Top Home Run Ideas in Three Out of Favor Groups

'The time of maximum pessimism is the best time to buy.' Sir John Templeton Investors who had the courage to bet big on automotive and retailing shares at the depth of the Great Recession have reaped rich rewards. While bundled products like Fidelity Select Automotive (FSAVX) and SPDR Retail (XRT) are up more than 300%, selected stocks in these groups are up a lot more. Shares of Ford (F) and Saks (SKS) have risen more than 7-fold in just 20 months. With the S&P 500 up nearly 80% from the Great Recession lows, large company picks as plump as Ford or Saks are arguably hard to find in today's market. Yet, as 2010 ends and investors holding losers in distinctly out-of-favor groups sell to recognize losses for tax purposes, those willing to embrace contrarian investing and look past near-term troubles can try to set themselves to score some big wins. With that said, here are my top three home run ideas: Number 3: Medical Devices Top pick: Medtronic (MDT) Concerns of new taxes and tougher product safety reviews have added to the woes of medical device companies that are already intensely battling each other amidst a slow down in sales. iShares Dow Jones US Medical Devices ETF (IHI) lags the S&P 500 index by 3%. My top pick in this industry is Medtronic (MDT) whose shares are down 24%. The company's sales have come under pressure as high unemployment and rising insurance costs have caused patients to cut down on doctor's visits. Meanwhile, Medtronic is looking to both in-house R&D and acquisitions to diversify its product base. Medtronic shares are a good bet if you believe patients cannot postpone the usage of medical devices forever. Increasing accessibility of more Americans to medical care is likely to increase demand for Medtronic's devices over time. The company is also seeing growth opportunities in emerging markets where it plans to triple its revenue in the next five years. Medtronic shares trade at a relatively modest 9.3 forward P/E. They offer a meaningful 2.7% dividend yield that can compensate investors a bit while waiting for the business environment to improve. Number 2: Natural Gas Top pick: First Trust ISE-Revere Natural Gas (FCG) Natural gas prices are down nearly 29% this year. Slack industrial demand and higher production have caused natural gas inventories to swell. The Energy Department recently reported total natural gas storage of 3.8 trillion cubic feet, 9.5% above the five-year average. Shares of natural gas producers like Anadarko Petroleum (APC), Chesapeake Energy (CHK), Devon Energy (DVN) and EnCana (ECA) are underperforming the S&P 500 by 3% to 24% this year. Natural gas and natural gas stocks are interesting as a long-term play. For one, industrial demand should pick up as economic activity increases. The cleaner burning virtue of natural gas is also likely to come to bear at some point, prompting electric utilities to switch from coal- to natural gas-fired power plants. Given the price structure of natural gas is in contango, i.e., upward sloping forward curve, natural gas stocks are better play than commodity ETFs like United States Natural Gas (UNG) or iPath DJ-UBS Natural Gas ETN (GAZ) where returns are likely to be held back by negative roll-yield. First Trust ISE-Revere Natural Gas (FCG) that invests in stocks of natural gas producers is my preferred natural gas play. Number 1: Education Services Top pick: Apollo Group (APOL) Education services stocks are among the most 'unloved' ones in the stock market today. AlphaProfit's education service index that includes companies like Apollo Group (APOL), DeVry (DV), Education Management (EDMC), ITT Educational Services (ESI), and Strayer Education (STRA) is down 36% year-to-date. The U. S. Education Department has turned the heat on companies in the education services group stating that some companies have misrepresented the value of their programs. The department has proposed changing rules on recruiting and marketing practices. The department has also proposed that institutions with less than a 35% debt repayment rate be made ineligible for federal student loans. The recovery potential for high-quality education services stocks may be quite large considering their important role in higher education and retraining. My top pick for contrarian investors in this space is Apollo Group, the largest private university with an enrollment of over 475,000. Apollo shares currently trade at a forward P/E of 7.5. I believe the P/E multiple will expand and Apollo shares will amply reward investors if the company returns to posting positive year-over-year EPS growth comparisons at some point. To do so, the company is getting into less cyclical advanced degree programs where it can compete with scale and efficiency against traditional schools. Apollo is also expanding globally through its partnership with the Carlyle Group.