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Posted 1/11/2001
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Extra!
24 battered small-caps the insiders are buying
Survivors of the sector's carnage can take advantage of a less crowded market and less competition for capital to begin all over. Here are 24 companies whose executives are already snapping up shares.
By Victor Niederhoffer and Laurel Kenner
Populations, be they animal, human or market, go through cycles of growth. Acceleration is followed by deceleration, stagnation and decline. When a bottom is reached, reproduction quickens and the cycle repeats.
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These cycles happen because, as the density of a population increases, competition for resources brings about higher death rates and lower birth rates.
When the number of anchovies in the Pacific Ocean off Peru is high, the death rate is also high. Predation is great, food starts to become scarce and the population is ready to decrease. When the anchovy number is low, the fish have an open sea for food and they're hard for predators to find. Growth is high, and the cycle is ready to begin again.
In the stock market, the dynamics are easy to describe, though hard to predict. A new industry is formed; leading companies to grow rapidly as knowledge, research and rising stock prices enable them to prosper. Then, new entrants come in, slowing the leaders' growth and reducing profits for everyone. Decline sets in. But after new issues and debt financing dry up, the birth rate can start increasing once again.
Compared with the simple cycles in fish, fruit flies or lemmings, those of the market are complicated. Birth rates, death rates and carrying capacity are variable and sometimes random. People read, talk and learn. New ideas affecting growth and death rates are transmitted at increasingly faster speeds thanks to television and the Internet.
For certain sectors of the market, though, the models of ecology provide a nice understanding of the creation of returns. One such sector is beaten-down stocks.
In our Dec. 28 column, we discussed a symptom of this process. Nasdaq industry groups that fell more than 20% in a year tend to go up the next year. Stocks that fall one year tend to go up, and vice versa. Our portfolio of five recommended stocks based on this phenomenon is up 11% since the close Dec. 27. In related work using similar reasoning, we recommended at the end of the year the purchase on full margin of a portfolio of Internet stocks in our daily column at Worldlyinvestor.com, and that group is up close to 50%.
Small-cap sufferers
For today's column, we applied our theory to stocks in the universe of the S&P Smallcap 600 Index $SML.X. These companies are divided by S&P into 95 industries, a distinction fine enough to show the rise and fall of hot and cold sectors with the interplay of density, supply and carrying capacity.
The small-cap groups that declined 25% or more outperformed the index, on average, for the past three years. Last year, the difference was substantial: a 20% return for the past year's losers, vs. 11% for the Smallcap Index as a whole. The effects were significant both from a statistical and practical point of view. Furthermore, the larger the decline in an industry group one year, the greater the expected rebound in the subsequent year.
While the concept is by no means a certainty, it does produce some good winners. The hospital group fell 30% in 1999, but rose 146% in 2000. On the other hand, bad fortune sometime repeats. Specialty textiles fell 51% in 1999 and 58% more in 2000.
Last year, the Smallcap universe was, unfortunately, littered with 22 different industry groups that declined 25% or more, a total of 145 stocks.
Down and Dirty
S&P Smallcap 600 Industry Groups Down More Than 25% in 2000
| Industry | Chg. 2000 | Industry | Chg. 2000 |
| Specialty Printing | -25 | Diversified Health Care | -43 |
| Building Materials | -28 | Housewares | -43 |
| Discount Retail | -28 | Employment Services | -44 |
| Leisure | -28 | Department Stores | -45 |
| Computer Software & Services | -31 | Photography | -46 |
| Electronic Parts Distributors | -31 | Personal Care | -52 |
| Home Shopping | -36 | Specialty Textiles | -58 |
| Publishing | -37 | Computer Peripherals | -61 |
| Consumer | -37 | Aluminum | -71 |
| Iron & Steel | -42 | Long-Distance Telecom | -73 |
| Communications Equipment | -42 | Computer Services | -78 |
With such an embarrassment of riches, we had the luxury of screening for stocks with net insider buying since the end of October. Here are the 24 that made the cut:
Negative attention
Stocks in Worst-Performing S&P Smallcap 600 Groups with Recent Insider Buying
| Industry | Stocks |
| Specialty Printing | Consolidated Graphics (CGX, news, msgs) |
| Discount Retail | ShopKo Stores (SKO, news, msgs) |
| Leisure | Coachmen Industries (COA, news, msgs) |
| K2 (KTO, news, msgs) | |
| Computer Software & Services | American Management Systems (AMSY, news, msgs) |
| eLoyalty (ELOY, news, msgs) | |
| Project Software & Development (PSDI, news, msgs) | |
| QRS (QRSI, news, msgs) | |
| Concord Communications (CCRD, news, msgs) | |
| Visual Networks (VNWK, news, msgs) | |
| Publishing | Penton Media (PME, news, msgs) |
| Iron & Steel | Steel Technologies (STTX, news, msgs) |
| Communications Equipment | Anixter International (AXE, news, msgs) |
| Harmonic (HLIT, news, msgs) | |
| Symmetricom (SYMM, news, msgs) | |
| Davox (DAVX, news, msgs) | |
| Housewares | Applica (APN, news, msgs) |
| Employment Services | Volt (VOL, news, msgs) |
| Labor Ready (LRW, news, msgs) | |
| Photography | Polaroid (PRD, news, msgs) |
| Specialty Textiles | Cone Mills (COE, news, msgs) |
| Computer Systems Services | InterVoice-Brite (INTV, news, msgs) |
| Computer Task Group (CTG, news, msgs) | |
| Analysts International (ANLY, news, msgs) |
The density of interest in these stock groups is low, and the food available for these stocks appears to us to be high. We predict that, while some of these individual stocks may continue to underperform, as a group they will nevertheless outperform the Smallcap Index over the next year.
As of the time of publication, neither Laurel Kenner nor Victor Neiderhoffer controlled equities in the companies listed in this article.
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.