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Posted
12/5/2002 |
The Speculator
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The Speculator
10
mid caps to help stuff your stocking
Mid-cap stocks pick up a
little bounce at the end of the year, and we think we've found a way
to cash in: Play the top performers through November for a December
gain. Here are the names.
By Victor
Niederhoffer and Laurel Kenner
(Scene: Speculators at work, barely visible
behind computer monitors, stacks of books, piles of spreadsheets,
Gilbert & Sullivan CDs and printouts of academic studies.)
Vic: Laurel, let’s buy some mid-cap stocks. At
year-end they seem to bounce.
Laurel: Isn’t that,
shall we say, a bit humdrum? I've never thought of you as a mid-cap
kind of guy, Vic.
Vic:
Well, I've traded the extremes my whole career. I've pyramided gold
up from $300 to $600 and held 10% of the open interest at the time.
I bought stocks below $1 with 100% of my net worth in the `70s and
doubled my money. I bought high-priced Nasdaq stocks near the
beginning of the millennium, only to see them stumble.
Unfortunately, I shorted thousands of contracts of the dollar/yen as
it climbed from 80 to 130, and I sold naked puts on the S&P
futures a week before they closed the exchange. I was heavily long
the stock market throughout the Long-Term Capital crisis. I've heard
the owl, seen the elephant and ridden the screaming eagle. It's time
for me to quiet down, to buy stocks with the resilience of high caps
but the potential to gain like low caps.
Laurel: But
Vic, mid caps sound so middle-of-the-road. You’ve never settled for
mediocrity before, as far as I know. If we start talking mid caps,
readers might think we've lost our edge. Are we so bereft this week
that we're reduced to middling ideas? Anyway, there’s no such thing
as mid caps; there are only former low caps hopefully on the way to
becoming high caps and former high caps that fell by the wayside.
Not to belittle you, but you have to stay
young-hearted.
Vic: Laurel, please don’t give up on
me. I’m not so bereft as I seem. The average person is wiser than
all the sages and politicians in the world, and the same holds true
of the average stock -- the mid caps. One should never be too
highfalutin to consider them. Don’t forget the wonderful line from
Antoine de St.-Exupery’s "The Little Prince": “I must endure the
presence of two or three caterpillars if I wish to become acquainted
with the butterflies.”
Laurel: Don’t tell me you buy
that old wives’ tale that mid caps provide low-cap returns at
large-cap volatilities.
Vic: Laurel, I have been
studying stocks for more than 45 years now, and I have been exposed
to almost every deception that a few hundred dens of thieves could
come up with. I’m not quite that naïve.
Laurel: Or
that propaganda put forward by so many mediocrities that mid caps
offer bargains because analysts don’t cover them as closely as big
companies.
Vic: No, I don’t believe that. The market’s
too efficient, and that argument is just an excuse for starting new
“value” mutual funds. I've got some other tricks up my sleeves.
Remember that day in December (of 2001) when I first told you that
stocks get perky around the end of the year?
Laurel:
That was about low-priced stocks.
Vic: Yes, but not so
fast. It’s similar for the mid caps.
Laurel: All
right, then. Statistics on the table.
(Vic starts pulling
spreadsheets from the pile on the desk.)
Laurel
(punching a few keys on the computer): What’s in the
S&P Midcap 400 Index ($MID.X),
anyway?
| S&P Midcap 400: Biggest and
smallest |
| Biggest |
Market value (billions) |
|
Smallest |
Market value (millions) |
| M&T Bank (MTB) |
$7.54 |
|
Atlas Air (CGO) |
$94.9 |
| Gilead Sciences (GILD) |
$7.51 |
|
Sykes Enterprises (SYKE) |
$127.6 |
| Washington Post (WPO) |
$6.97 |
|
Retek (RETK) |
$240.9 |
| Affiliated Computer Services (ACS) |
$6.57 |
|
Metris (MXT) |
$398.4 |
| Symantec (SYMC) |
$6.38 |
|
Quanta Services (PWR) |
$259.2 |
| Microchip Technology (MCHP) |
$5.95 |
|
Transaction Systems Architects (TSAIE) |
$261.7 |
| Quest Diagnostics (DGX) |
$5.66 |
|
InFocus (INFS) |
$292.6 |
| Weatherford Int'l (WFT) |
$5.12 |
|
Carpenter Technology (CRS) |
$298 |
| Nat'l Commerce Financial (NCF) |
$5.14 |
|
Solutia (SOI) |
$306 |
| IDEC Pharmaceuticals (IDPH) |
$5.12 |
|
Unifi (UFI) |
$315 | | Source: Bloomberg
L.P.
Laurel: I’ve never even heard of
Affiliated Computer Services. (Calls up a description.) Oh,
wow. Affiliated does electronic commerce! You’ve got to be kidding
me, Vic. Nobody’s buying e-biz stocks these days.
Vic: Affiliated Computer happens to be up about 50%
since Oct. 9. Anyway, you don’t have to like the stocks. Just the
index.
Laurel: As I recall, the S&P Midcap 400
didn’t do so well against the S&P 500 ($INX)
in the last half of the ‘90s.
Vic: The S&P 500
beat the Midcap from 1994 through 1999, but the Midi did better than
the big caps in 1992-1993 and 2000-2002. (Hands her a
table.)
| S&P Midcap 400 vs. S&P 500,
Annual return (1992-2002) |
| Year |
S&P Midcap 400 |
S&P 500 |
| 2002 (through November) |
-10.90% |
-17.20% |
| 2001 |
-1.60% |
-13.00% |
| 2000 |
16.20% |
-10.10% |
| 1999 |
13.30% |
19.50% |
| 1998 |
17.70% |
26.70% |
| 1997 |
30.40% |
31.00% |
| 1996 |
17.30% |
20.30% |
| 1995 |
28.60% |
34.10% |
| 1994 |
-5.50% |
-1.50% |
| 1993 |
11.70% |
7.10% |
| 1992 |
9.50% |
4.50% | | Source: Bloomberg L.P.
Vic:
S&P introduced the Midcap 400 in June 1991. Through November of
this year, the Midcap rose 272% in price, vs. 152% for the S&P
500.
Laurel: What about with dividends reinvested?
Vic: The S&P 500 has paid out about half a point
more over the years, but that would only narrow the difference in
performance by 5 percentage points or so. The Midi still looks
superior.
Laurel: Say I decide to buy and hold the
Midi. What’s the best way to do it?
Vic: The
Midcap SPDR (MDY,
news,
msgs),
an exchange-traded fund that acts like a stock, trades on the
American Stock Exchange. There’s also the iShares Russell Midcap
Index (IWR,
news,
msgs).
About 300 mutual funds specialize in mid caps. Morningstar
breaks performance into mid-cap value, mid-cap growth and mid-cap
blend. The value and growth funds, in the aggregate, are No. 3 and
No. 4 in the five-year performance rankings for U.S. mutual funds,
behind health and financial. The annual return on value and growth
has been about 4% over the past five years, compared with an annual
gain of 0.7% for large-cap value and a 1.2%-per-year loss for
large-cap growth. You might also consider the Vanguard Mid
Capitalization Index Fund (VIMSX),
a no-load mutual fund with an expense ratio of 0.25%.
There
are also S&P Midcap 400 futures, which have been trading on the
Chicago Mercantile Exchange in both “big” and “E-mini” versions
since June 19, 1991.
Laurel: $500 a point on the big
contract, and $100 a point on the E-mini?
Vic: Right.
But you’d need sufficient reserves to ride out potentially huge
margin calls in a down market.
Anyway, these excess returns
aren’t necessarily the chink in the armor. It appears that the only
time the Midi is worth buying is during the October-to-December
quarter, when it goes up at an average rate of some 8%. During the
other nine months, the Midi rises at a rate barely above 1% a
quarter.
Laurel: Too late the phalarope, for this year
anyway.
Vic: Not really. December has been
particularly good.
| S&P Midcap 400 vs. S&P 500
|
| Monthly seasonality,
1992-present |
S&P Midcap 400 |
S&P 500 |
| Jan |
0.20% |
1.80% |
| Feb |
0.80% |
-0.50% |
| Mar |
0.70% |
0.90% |
| Apr |
1.80% |
1.30% |
| May |
1.00% |
0.80% |
| Jun |
0.20% |
0.40% |
| Jul |
0.00% |
-0.20% |
| Aug |
0.10% |
-1.30% |
| Sep |
0.30% |
-0.80% |
| Oct |
1.40% |
2.50% |
| Nov |
2.30% |
2.50% |
| Dec |
4.20% |
1.70% | | Source: MSN Money
Laurel: Hmm
-- 4.2% for the Midi in December, compared with 1.7% for the S&P
500. But really, Vic, I never thought I’d see you recommend a
one-month trade with a mere 4% expectation, considering the
commissions and the bid-asked spread you’re always talking about,
which would take a good part of that abnormal return away.
Vic: Ah, but there’s another angle: tax selling.
Mid-cap companies that have shown the best performance year-to-date
tend to be held over to the next year so the investor doesn’t have
to realize the taxable gain. The best performers among the Midcap
400 from the close of each year through November tend to do very
well indeed in December
Laurel: How well,
Vic?
Vic: Over the last four years, well enough to put
some Christmas gifts under the tree.
| S&P Midcap 400 |
| December performance for 10 best
stocks of first 11 months |
|
| Year |
Top 10’s December performance |
| 1998 |
20% |
| 1999 |
29% |
| 2000 |
26% |
| 2001 |
3% | |
Laurel:
Not so good last year, when the Midcap Index itself rose 5%. Anyway,
isn’t the tax effect likely to be dissipated this year? So many
stocks have big losses that everyone’s going to be able to sell as
many big gainers as they want without having to worry about
taxes.
Vic: You could have made the same argument
about 2000 and 2001, when these stocks outperformed the S&P 500.
Also, mid caps benefit when they’re eventually elevated to the
S&P 500, as has been well documented by our editor (and MSN
Money columnist) Jon Markman.
Laurel: Well, you’ve
convinced me. You’re not getting old-hearted after all, and
regardless, it’s better than the alternative. Exactly what are the
10 best companies this year that you plan to muddle into?
Vic: Laurel, remember there is tremendous variability
in these stocks. And the results of our study suffer from being
retrospective, i.e., looking back rather than forward. However,
taking one consideration with another, I think we should buy
these:
| S&P Midcap 400 |
| 10 best performers year-to-date |
|
|
| Company |
YTD % chg |
Market cap |
| SanDisk (SNDK) |
92.7 |
$1.9 bln |
| Imation (IMN) |
90.7 |
$1.4 bln |
| PetsMart (PETM) |
87.5 |
$2.6 bln |
| Dreyer's Grand (DRYR) |
82.1 |
$2.4 bln |
| Coach (COH) |
74.6 |
$3.1 bln |
| Claire's Stores (CLE) |
71.9 |
$1.3 bln |
| PacifiCare Health (PHSY) |
67.2 |
$970 mln |
| Energizer Holdings (ENR) |
55.4 |
$2.7 bln |
| Agco (AG) |
53 |
$1.8 bln |
| Ross Stores (ROST) |
44.2 |
$3.6
bln | | Source: Bloomberg L.P.
Final notes
If you’d like to see a full
workout of this 10-best strategy for past years, visit our Web site
at http://www.dailyspeculations.com/.
We will send a special bonus extension of the study to those who
write us with augmentations, encomia or critiques. If you’d like to
see a list of all constituents of the S&P 400 Index, visit
Standard & Poor’s Web
site.
We often receive much abuse alongside the
much-appreciated compliments. The reason is that we do not follow
the pathetic practice of telling our readers to buy if they think
the market’s going up and to sell if they think it’s going down. We
are unequivocal. Thus, when we are bullish we antagonize all the
bears, and vice versa. But there’s another reason: Yes, we have been
too bullish this year. We never fail to emphasize that the 1.5
million percent returns that the authors Dimson, Marsh and Staunton
(in Triumph of the Optimists) found for U.S. stocks in the
20th century seem appropriate to us for the 21st century.
We
were killed on some of our own purchases of biotechs in October 2001
and beaten-up Nasdaq stocks in June 2002. Thus, we are pleased to
report good results for the last two sets of stocks we bought. Our
picks of Oct. 24 (“5 genuine buys
on a street of impostors”) are up an average of 11% from the
publication date. The seven low-priced stocks that we suggested as
planned purchases on Nov. 20 (“7 stocks that
bring out the animal in us”), are up an average of 40%. The
smallest gain, 6%, was in ADC
Telecommunications (ADCT,
news,
msgs);
the others were in the 40% to 80% range. Thus, we are not always too
bullish.
At the time of publication, Victor Niederhoffer
and Laurel Kenner were long the 10 mid caps listed in their final
chart -- SanDisk, Imation, PetsMart, Dreyer's Grand, Coach, Claire's
Stores, PacifiCare Health, Energizer Holdings, Agco and Ross
Stores.
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