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Posted 12/28/2000
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The Speculator
Down 78%? We call that stock a buy
We tap five of 2000's worst-performing stocks in the belief that what goes down almost invariably goes up -- and goes up big.
By Victor Niederhoffer and Laurel Kenner
Never look for birds of this year in the nets of the last.
Cervantes, "Don Quixote"
An excellent working hypothesis for the performance of markets in a new year is that they will do exactly the opposite of what they did in the previous year.
Take, for example, some of the spectacular reversals in the eight Nasdaq ($COMPX) industry sectors. In 1999, computers and telecoms were both up more than 100%; this year, computers are down 43% and telecoms are down 56%. In 1994, biotech fell 18%, then rose 89% in 1995.
Widening the scope a bit, among commodities, oil was down 50% in 1998 and up 100% in 1999. Soybeans were down 33% in 1988, up 33% in 1989. And, of course, gold, up 58% in 1979, up 100% in 1980 and down 25% in 1981.
Regrettably, this hypothesis is not valid for all years and seasons. For example, the Nasdaq sector rankings for 1998 and 1999 were exactly the same, a 1-in-40,000 event by chance. One regularity that does seem to hold is that on those rare occasions that a Nasdaq industry group shows a decline of 10% or more for the year, it comes back strongly in the positive direction the next year.
Performance of industry groups in years
after 10% declines
| Industry | Year | Year Decline (%) | Move Next Year (%) |
| Banks | 1998 | -12 | -8 |
| Biotech | 1994 | -18 | 89 |
| Telecom | 1994 | -16 | 34 |
| Transportation | 1994 | -16 | 23 |
| Banks | 1990 | -35 | 37 |
| Telecom | 1990 | -35 | 30 |
| Other Financial | 1990 | -29 | 56 |
| Insurance | 1990 | -17 | 33 |
| Transportation | 1990 | -16 | 37 |
| Banks | 1989 | -10 | -35 |
| Other Financial | 1987 | -12 | 13 |
| Insurance | 1987 | -13 | 23 |
Average up-move in year following 10% decline: 25%
As to why this should happen in markets, it is necessary to consider the invisible hand. While markets are not animate beings, they do act to maintain the survival of the species that are their foundation: members of the exchanges and the lower ranks of the market ecosystem.
When a system or group performance becomes too attractive, the lower echelons bid the prices up, thereby reducing the returns. Then, an insidious process, the law of ever-changing cycles, takes over.
Jack London knew of this danger in 1900. In "The Call of the Wild," he describes Manuel, who sold Buck away to the Klondike: "In his gambling, he had one betting weakness -- faith in a system -- and this made his damnation certain."
In markets, when a system becomes too popular, the chances of a move in the expected direction become lower. Thus, oil doesn't like to rise after it has been going up for many years.
Individual stocks share with groups a tendency to reverse between years. Among the 10 best Nasdaq 100 performers in 1999, the top performer, Qualcomm (QCOM, news, msgs), rose 2,396%, then fell by 52% by Dec. 26. CMGI (CMGI, news, msgs) gained 909%, only to lose about 95% in 2000. Starbucks (SBUX, news, msgs), whose 14% loss in 1999 put it on the 10 worst list, gained about 85% this year.
10 best Nasdaq 100 performers in 1999
| Stock | % Chg. in 1999 | % Chg. in 2000* |
| Qualcomm (QCOM, news, msgs) | 2,396 | -52 |
| BroadVision (BVSN, news, msgs) | 1,494 | -75 |
| VeriSign (VRSN, news, msgs) | 1,192 | -58 |
| BEA Systems (BEAS, news, msgs) | 1,042 | 107 |
| Exodus (EXDS, news, msgs) | 1,006 | -50 |
| SDL Inc . (SDLI, news, msgs) | 1,000 | 30 |
| CMGI (CMGI, news, msgs) | 909 | -95 |
| JDS Uniphase (JDSU, news, msgs) | 830 | -49 |
| Abgenix (ABGX, news, msgs) | 715 | 76 |
| Echostar (DISH, news, msgs) | 706 | -47 |
Average move in 2000: -21%
Worst Nasdaq 100 performers in 1999
| Stock** | % Chg. in 1999 | % Chg. in 2000* |
| Staples (SPLS, news, msgs) | -29 | -46 |
| Cintas (CTAS, news, msgs) | -25 | 45 |
| Starbucks (SBUX, news, msgs) | -14 | 87 |
| Concord EFS (CEFT, news, msgs) | -9 | 72 |
| Genzyme (GENZ, news, msgs) | -8 | 109 |
| Compuware (CPWR, news, msgs) | -5 | -82 |
| Biomet (BMET, news, msgs) | -1 | 46 |
** Only seven Nasdaq 100 stocks fell in 1999.
Average move in 2000: 33%
Keep track of Victor Niederhoffer and Laurel Kenner's picks on their Recommendations page.
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We also believe that the coming buzz concerning the privatization of Social Security, as well as the change in direction of central banking authorities around the world, adds a further bullish foundation to the market.
Sam Eisenstadt, the venerable research chairman at Value Line, who has by general acclamation the best published record of all advisers, agrees. In an e-mail, he told us, "I am very bullish these days, as I have been at several key turning points in the past. I am projecting a 15.5% increase in the Dow based on a modest increase in earnings and dividends, and a decline in corporate yields."
Under the circumstances, we plan to throw caution to the winds ourselves and buy the following five companies -- all among the 20 worst performers of the Nasdaq 100.
| Company | 2000 Move |
| Conexant (CNXT, news, msgs) | -78% |
| Apple Computer (AAPL, news, msgs) | -72% |
| Dell Computer (DELL, news, msgs) | -67% |
| Level 3 Communications (LVLT, news, msgs) | -62% |
| Nextel Communications (NXTL, news, msgs) | -50% |
The stocks listed above have a reasonable balance tilted toward the buy side in recent insider trading. But be aware that these are statistical plays only, and as such we are unencumbered by any concern about their fundamental prospects. They are very volatile indeed, and we welcome you to watch their progress on our Recommendations page at MSN MoneyCentral.
At the time of publication, the authors owned no stocks or funds mentioned 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.