To print article, click
Print on your browser's File menu.
Go back
Go back
Posted 1/25/2001
Related Resources
Keep track of Victor Niederhoffer and Laurel Kenner's picks on their Recommendations page.
Related Site
GTIndex.com
Details
 |
Recent Articles
• 24 battered small-caps the insiders are buying, 1/11/00
• Do stocks grow better in the sunshine states?, 1/4/01
• Down 78%? We call that stock a buy, 12/28/00
more. . ..
3 solid stocks the market rebound missed
Sure, we predicted a turnabout, but who'd have guessed it would be so utterly complete? The problem now is finding undiscovered turnaround potential. And we've got a few ideas.
By Victor Niederhoffer and Laurel Kenner
So we beat on, boats against the current, borne back ceaselessly into the past.
-- F. Scott Fitzgerald, The Great Gatsby
The ecology of the markets in the first two weeks of the new year has the winds blowing at the backs of the beaten-down growth stocks. What a reversal of fortune it has been.
For example:
- For the 10 stocks that were the worst performers in the S&P 500 ($INX) last year, the average gain from year-end through Friday was 44%.
- For the 10 stocks that were the best performers in S&P 500 last year, the performance to date is -11%.
The reversals in some warm-weather Asian and South American markets are equally dramatic. South Korea, Taiwan and Thailand were all down some 50% last year and are already up 20% this year. Argentina, Mexico and Brazil were down by percentages in the small teens last year and are up from 5% to 20% this year.
And there are many other samples, calculated as of Friday's close:
- For the 30 S&P 500 stocks that had four or more consecutive quarters of decline going into this year, the average performance is up 21%.
- For the 32 S&P 500 stocks that had four or more consecutive rising quarters last year, the average performance for this year is down 8%.
- The Nasdaq Composite ($COMPX) was down 39% last year and is up 6% this year.
- Bond prices rose 20% last year and this year they have fallen 2.3%.
- Of the 13 S&P Smallcap 600 Index industry groups that fell 40% or more last year, the average rise for 2001 through Friday was 10%, compared with 1% for the index itself.
Similarly, the two worst S&P groups in 2000 were technology and communications, both registering a 40% decline. And yes, they are the best two so far in 2001, rising respectively 18% and 10%.
In all, there was an almost perfect inverse relation between the two sets of groups, with the rank correlation between them -0.8, with -1 being a perfect inversion.
If we do say so ourselves …
But the easiest thing in the world is to describe the complete reversal of fortune in the leaders and laggards among stocks between last year and this year. We are wary of self-administered pats on the back, recognizing the temptation for columnists to gloss over their bad recommendations and remember their good ones as even better than they were.
As one reader wrote to tell us, "You may want MSN to remove your April 2000 article from the archives available for viewing. Your article was a little too bullish for what has transpired since then. If you're using the same crystal ball for today's article, you may want to trade it in for a new one." That would be our April 28 column, in which we wrote: "The market and individual stocks can be anticipated, in our minds, to return to their former power over the next few weeks and months."
The Nasdaq then proceeded to close the year 36% lower, after a nice rise through Aug. 31. Yes, we're trying to find a crystal ball that's better, and if any readers have a better one for sale or loan, please alert us.
Another reader wrote of Vic, "You would be better off without that dope."
We are going to make much more of an effort this year to stay on top of a portfolio that we would actually recommend and clearly differentiate it from our quasi-scientific reports on various anomalies and mumbo-jumbos. Our recent picks and calls, we're happy to report, have done rather well.
The reason the S&P group inversion is our favorite statistic is that we did not find it from our armchair two weeks into the beginning of the year. On Dec. 28, we wrote in "Down 78%? We call that stock a buy": "An excellent working hypothesis for the performance of stocks in a new year is that they will do exactly the opposite of what they did the previous year....Never has the prospective growth rate of Nasdaq stocks been so great relative to long-term interest rates and earnings/price ratios."
We predicted an inversion of industry performance, and put statistics on the table to support it. And we recommended the purchase in that column of five stocks -- Conexant (CNXT, news, msgs), Apple Computer (AAPL, news, msgs), Dell Computer (DELL, news, msgs), Level 3 Communications (LVLT, news, msgs) and Nextel Communications (NXTL, news, msgs). As of Friday's close, they were up 29%, on average.
In our MSN MoneyCentral column of Dec. 21, "Lessons for a lifetime -- with a side of crow," we recommended growth stocks for 2001 for the following reason: "Bond yields are near their lowest in two years, and the Fed looks ready to cut interest rates." The government would soon be putting a portion of Social Security contributions into stocks, we said, and "more important, we can look forward to even greater improvements in three key areas that were the source of growth in the 20th century: scientific knowledge, health and longevity." We finished by recalling the great panic of December 1899, after a contemporary news account said that at least now investors were better off because that terrible decline was behind. "And we can write the same," we said.
The 2001 portfolio of Internet stocks we recommended in our daily worldlyinvestor.com column, using the same reasoning, is up 188%.
Three stocks overdue for a rebound
The incredible alacrity with which these stocks have revived has changed the relationship between beaten-down and favored. Many stocks that were begging to be bought at values below book value, with P/E ratios well below their growth rate, have already shown spectacular rises. When we tried to find semiconductor companies with recent insider buying that got killed last year, for example, we found that almost all the likely candidates had already shown rises of a third or more this year.
We examined some 100 stocks in the major tech indexes to find some candidates for purchase that have a favorable ecology -- i.e., growing industry, beaten down last year, little supply from recent IPOs, insider buying, a reasonable Value Line timeliness rating, and no inordinate gain so far this year.
We have found three that seem to meet the bill: Hewlett-Packard (HWP, news, msgs), KLA-Tencor (KLAC, news, msgs) and Xilinx (XLNX, news, msgs). These are statistical plays only. We hereby add these to our list. Regrettably, since there has been a recent insider sale in Dell -- doubtless for estate planning or college tuition only -- we must recommend the sale of this issue. Accordingly, we shall compute the profits and losses of our recommended portfolio with this Friday's closing price for Dell.
While it's comparatively easy to describe the past, the hardest thing in the world is to predict where the market is going in the next several days and weeks. Regrettably, the recent superior performance of the Nasdaq 100 relative to the S&P 500 does not augur well, from a statistical viewpoint, for further Nasdaq gains in the next several weeks. Ditto last week's 10% gain in the Nasdaq 100 and the ignominiously low levels that bonds had moved to as of last Friday.
Under the circumstances, we would not be surprised to see a pause in the Nasdaq's ascent from its current level of 2,700 to its ultimate destiny beyond its old highs.
The advance of science, health and economic growth will carry the day, however. The 10%-a-year returns for random baskets of stocks will again reassert themselves, especially now that Social Security privatization is around the corner and the Fed is in an easing mode.
Like the old-hearted men we poke fun at for being bearish during the last 12 years, we are bound to be right someday. The question is when?
At the time of publication, Victor Niederhoffer owned shares of Dell Computer. Laurel Kenner did not own or control any of the stocks mentioned in this article.