Jan

1

The median stock return (not counting dividends) among the S&P 500 was 11% for the year 2006. One quarter of the 500 stocks had returns above 25.0%, and one quarter had returns below 1.8%, giving a semi-interquartile range of 23.2%. This compares to a semi-interquartile range of 26.6% in 2005.

Year 2005 2006
% of Stocks with Returns greater than 25% 21% 25%
Median 2.2% 11.0%
Bottom 25% of Stocks Returns -5.6% 1.8%

Therefore it appears there was more cross-sectional variability in 2005 than 2006. The top 10 stocks in 2006 were:

Name of Company Symbol Return
Allegheny Tech ATI 152%
Terex TEX 118%
Nvidia NVDA 103%
OfficeMax OMX 96%
Big Lots BIG 91%
Celgene CELG 78%
DirecTV DTV 77%
BellSouth BLS 74%
Hercules HPC 71%
CB Richard Ellis CBG 69%

The top company, Allegheny Tech, now says it produces “specialty materials,” but years ago was known as a stainless steel maker. I see also that flat-rolled products account for 38% of their sales. I know the stock from my days as a finder, when it sold at 80% of book on average, whereas it now sells at 740% of book, after deficits in 2002-204, and zero-ish earnings in 2001-2002.Terex, the second top, produces off-road trucks. Except for Nvidia, which designs and markets three dimensional graphics processors, many of the top ten companies are in industries of the kind favored by the Sage, industries that produce relatively humdrum products, and that economic theory, based on the rate of profit for competitive industries with few barriers to entry, would not anticipate as creating too great a rate of return.

The ten worst companies were WFMI, APOL, ADC, YHOO, JBL, AMD, SNDK, EBAY, BSX, and NOVL, all down 30% to 40%. These are companies, with the exception of Whole Foods, that are research intensive, producing products that should have a high price to weight ratio, involving software or electronics.

In previous studies we have found that the ten worst-performing S&P 500 companies in a year perform much better in the next year than the ten best-performing companies. That study has to be updated and tested carefully however, to make sure that it is not a phenomenon of the cut-off, or of one or two outliers, or of great performance from low-priced shooting stars. Despite this, based on the preliminary review, I predict the ten worst stocks have a higher a priori expectation for the next year than the ten best.


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