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Posted 10/19/2000
Kenner & Niederhoffer
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When best and worst diverge, follow the worst
The markets' top- and bottom-level performers aren't often this far apart, making the downtrodden big stocks in the S&P 100 easy-to-find candidates for bargain hunters. Paired with insider buying patterns, five real comeback possibilities leap out.
By Victor Niederhoffer and Laurel Kenner
I have raised a monument more lasting than brazen statues, and higher than the royal pyramids, a monument which shall not be destroyed by the wasting rain, the fury of the north wind, or the flight of ages.
-- Horace, Carmina
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Not in at least a generation has such a divergence developed between the best- and worst-performing big stocks.
The losses in famous companies this year are staggering in themselves: Lucent Technologies (LU, news, msgs) down 69%, MSN MoneyCentral publisher Microsoft (MSFT, news, msgs) down 57% and AT&T (T, news, msgs) down 53%.
To get our bearings, we looked at the divergence between the 10th best and 10th worst stocks in the blue-chip Standard & Poor's 100 Index ($OEX), year-end through Oct. 16 for the years 1987-2000. (We didn't choose the single best and single worst stocks because, statistically, the 10th best and worst are considered a more stable reflection of the divergence). Here are the results:
S&P 100 best/worst divergence
| Year | 10th worst % loss | 10th best % gain | Divergence (% pts) |
| 1987 | -6 | 51 | 57 |
| 1988 | -6 | 33 | 39 |
| 1989 | -9 | 48 | 57 |
| 1990 | -47 | 9 | 56 |
| 1991 | -3 | 71 | 74 |
| 1992 | -20 | 29 | 49 |
| 1993 | -14 | 46 | 60 |
| 1994 | -14 | 25 | 39 |
| 1995 | -2 | 60 | 62 |
| 1996 | -9 | 42 | 51 |
| 1997 | -1 | 68 | 69 |
| 1998 | -0.4 | 19 | 19 |
| 1999 | -29 | 54 | 83 |
| 2000 | -47 | 43 | 90 |
The 10th-best stock this year, Baxter International (BAX, news, msgs), is up 43%, versus a 47% loss for Weyerhaeuser (WY, news, msgs), the 10th worst. The difference -- 90 percentage points -- is higher than the previous widest divergence of 83 in 1999. (The worst of the worst this year, in case you were wondering, is Bethlehem Steel, down 71%).
Kenner & Niederhoffer
Victor Niederhoffer has traded stocks, currencies and futures worldwide for the past 40 years; he is the author of "The Education of a Speculator." Laurel Kenner is a trader and former Bloomberg markets editor. In this series of columns for MoneyCentral, they'll assess the past week's Wall Street performance and next week's prospects. Let us know what you think in the Start Investing Community.
Not since 1990 has the 10th worst-performing S&P 100 stock been so far in the red -- the loss was 47% in both cases.
The 90-point divergence between good and bad this year has outdone even 1987 through the end of October, a period encompassing the worst crash in U.S. market history. The difference then was 48 percentage points.
But does it matter?
Are these statistics significant -- or just interesting? Depends on your point of view.
Marks is a specialist in leveraged buyouts, with a refined sense of price. Because of his practicality and non-bombastic style, we call him the Shakespeare of markets. He didn't set out to be the world's best investment adviser, but as far as we can tell, of all the big operators he's the best, with more than 30% annual gains for more than 30 years.
Another reason to take note of the best-worst divergence this year is that many of these beaten favorites are companies with brand names, distribution systems, customer loyalty, infrastructure, supplier networks and employee bases that are unlikely to completely wither away.
Related research by our friend Steve Kagan, now chief economist for New York Gov. George Pataki, shows that big downtrodden companies tend to climb back up the mountain after a decline of this nature. Here are some examples, taken from the list of 10 worst for each year. (Performance is from Oct. 16 in the year the stocks made the 10 worst list through Oct. 16, 2000.)
| Company | Yr. on 10-worst list | % Chg. (thr. Oct. 16, 2000) |
| Merrill Lynch (MER, news, msgs) | 1987 | 1,269 |
| Texas Instruments (TXN, news, msgs) | 1988 | 1,621 |
| EMC (EMC, news, msgs) | 1989 | 132,494 |
| American Express (AXP, news, msgs) | 1990 | 932 |
| United Technologies (UTX, news, msgs) | 1991 | 570 |
| Boeing (BA, news, msgs) | 1992 | 225 |
| Johnson & Johnson (JNJ, news, msgs) | 1993 | 364 |
| Pepsi-Cola (PEP, news, msgs) | 1994 | 197 |
| Home Depot (HD, news, msgs) | 1995 | 356 |
| Unicom (UCM, news, msgs) | 1996 | 119 |
| Amgen (AMGN, news, msgs) | 1997 | 446 |
| Citigroup (C, news, msgs) | 1998 | 142 |
| Home Depot (HD, news, msgs) | 1999 | 78 |
Following the stable 100
It's hard to test such a system because there's too much survivor bias. We used the current members of the S&P 100 and followed them backward through 1987. The S&P 500's membership has changed substantially over the last few years, as more and more tech stocks became members, replacing Old Economy companies.
Fortunately, the S&P 100 is a fairly stable group of companies, with stalwarts like Xerox, Bethlehem Steel (BS, news, msgs) and May Department Stores (MAY, news, msgs) still the standards as far as Standard & Poor's is concerned. In this year's list of the 10 best and 10 worst, Old and New Economy stocks are fairly evenly distributed.
One piece of evidence concerning these fallen monuments is the performance of stocks in the Dow Jones Industrial Average that have been down 40% or more during the first 9½ months of the year. Again, going back to 1987, we found only three years in which a current Dow stock was down 40% or more: Philip Morris (MO, news, msgs) in 1999, and American Express (AXP, news, msgs) and Hewlett-Packard (HWP, news, msgs) in 1990. Not even Woolworth (Z, news, msgs), removed in 1997, ever fell that much when it was part of the index.
The returns of the two latter stocks to date -- on the order of 2,000% for American Express, and 1,300% for Hewlett-Packard -- are comforting. Philip Morris is up 13% from Oct. 16, 1999. (In fairness, Hewlett-Packard was not a member of the Dow until 1997.)
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We believe the current beaten favorites in the S&P 100 are good candidates for purchase, especially now that the return of the Treasury bill has beaten the broad market over the past 18 months. Here are the 10 worst of 2000, year-to-date:
| Stock | % Chg YTD |
| Weyerhaeuser (WY, news, msgs) | -47 |
| Polaroid (PRD, news, msgs) | -51 |
| International Paper (IP, news, msgs) | -51 |
| AT&T (T, news, msgs) | -53 |
| International Flavors (IFF, news, msgs) | -55 |
| Microsoft (MSFT, news, msgs) | -57 |
| Unisys (UIS, news, msgs) | -65 |
| Xerox (XRX, news, msgs) | -66 |
| Lucent (LU, news, msgs) | -69 |
| Bethlehem Steel (BS, news, msgs) | -71 |
Of the 20 worst performers this year, five had insider buying in the last three months. These are worthy of special mention, and we recommend them in a separate portfolio, as follows:
International Flavors (IFF, news, msgs)
Xerox (XRX, news, msgs)
Bethlehem Steel (BS, news, msgs)
Honeywell (HON, news, msgs)
Homestake Mining (HM, news, msgs)
Vic's research shows that big stocks that are down a lot with insider buying tend to outperform the market by 10 percentage points over the next nine months.
Enough said.
At the time of publication, Laurel Kenner owned or controlled shares in the following equities mentioned in this column: Microsoft and Lucent Technologies.
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.