11 Picks under $5, 5/27/01 from MSNBC
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The Speculator
11 dirt-cheap stocks for a scorched-earth market
Sub-$5 stocks are statistically the most likely to recover quickly, and with investor sentiment, the calendar, political reality and the numbers aligning, it's time to buy.
By Victor Niederhoffer and Laurel Kenner
"After a significant disturbance in an ecosystem, such as a major fire, the clear-cutting of a forest, or the bulldozing of a meadow, a process of succession begins. First come pioneer species -- fast-growing, fast-spreading plants adapted to life in harsh conditions.”
-- Ernest Callenbach, “Ecology: A Pocket Guide”
After forests have been ravaged by fire, plants that were healthy to start with often enjoy vigorous growth. We are confident that this tendency holds lessons for the stock market.
Pick 4 stocks
and battle a killer.
Get started now.
On both a technical and fundamental basis, stocks are cheap. Recall that the value of stocks is based on a stream of earnings discounted for risk and interest rates. With interest rates at 40-year lows, the value of a dollar of earnings today and in the future is considerably higher than in the past.
On the technical side, we will reiterate what we said in our Sept. 6 column (“A bear awakens feeling bullish”). After two consecutive monthly declines in the market, the average change the next month is a 3% gain. True, it hasn’t worked out this month. September has been a disaster, because investors were legitimately fearful after the attacks on the World Trade Center and Pentagon.
But is that any reason to give up on our optimism? We don’t think so. Quite the contrary. After a phenomenon proven valid hasn’t worked as expected, it becomes much more likely to work in the future.
One thing in our favor is that the attacks have changed the political environment for the better. President Bush is committed to providing a secure defense and to giving the economy the means to resume growing. His approval rating is 90%, the highest ever accorded a U.S. president. An unprecedented coalition of countries supports the United States.
Lastly, market psychology is on our side. Discouragement among investors is so great now that it’s much easier for stocks to go up than down.
It all comes together
Taking all of the above into account, we are recommending for purchase today (Thursday) and Friday a basket of stocks that is consistent with what we have learned about nature and the technical and fundamental characteristics of the market. This also is consistent with the advice we gave in our Aug. 16 column to buy stocks on Thursday after the previous Friday is down.
Just as grasses and shrubs are the first to return after fires, low-priced stocks tend to be the first to revive after a calamity. We have therefore chosen as our portfolio a selection of stocks priced at less than $5, with the highest ratings for “timeliness” -- a measure of earnings and price momentum -- from Value Line.
These stocks have a number of statistical tendencies going for them, according to work prepared for us by Value Line researchers Sam Eisenstadt and Tom Downing. Fortuitously, we’re at the end of the third quarter, and low-priced stocks tend to perform best in the fourth and first quarters of the year. The average return of stocks selling at $5 or less, in the two highest timeliness groups, has been some 36% from the end of September through the end of March, vs. a -1% decline from the end of March to the end of September.
Furthermore, on the six occasions over the past 15 years when Value Line’s top-ranked Group 1 and Group 2 stocks suffered a decline in the third quarter, returns three and six months later were as follows:
Date % return
in 3rd qtr % return
next 3 mos. % return
next 6 mos.
9/30/85 -8 18 21
9/30/86 -15 9 18
9/30/88 -3 0 10
9/30/90 -23 15 28
9/30/98 -27 38 3
9/30/99 -3 34 16
Average 19 16
Finally, over the past 12 years, Value Line’s “1”-ranked stocks have risen about 24% in the fourth quarter, on average, when the market fell during the first nine months of the year.
Here, then, are our choices, culled from the current Group 1 and 2 lists.
The After-the-Fire Portfolio
Company Business 9/25 price
R.G. Barry (RGB, news, msgs) Footwear 3.97
Corel (CORL, news, msgs) Software 2.21
Culp Inc. (CFI, news, msgs) Furniture fabric 3.15
Dixie Group (DXYN, news, msgs) Rugs 5.00
Navigant (NCI, news, msgs) Consulting 3.70
Novell (NOVL, news, msgs) Software 3.50
Office Max (OMX, news, msgs) Office supplies retailer 3.00
Parker Drilling (PKD, news, msgs) Drilling 3.05
QAD Inc. (QADI, news, msgs) Software 1.81
Read-Rite (RDRT, news, msgs) Computer components 2.99
Western Digital (WDC, news, msgs) Hard drives 2.37
We intend to buy all of these stocks, establishing half of our position near the close today (Thursday, Sept. 27), and the remaining half near the close on Friday, and plan to hold them through March 31. (If you decide to try as well, use a discount broker so that commissions don't eat up too much of the total expected edge.)
Be mindful that these are risky stocks indeed. The Sage of Nebraska says no stocks should be bought unless you are prepared to lose at least 50%. The group we are recommending could lose more than that because of their low price and small size, and we are obviously in unsettled times. But the sample size of our research is based on some 10,000 company quarters of data and are unlikely to be the result of chance variation alone.
A long war changes everything
One risk -- we feel it to be remote -- is that the war with the terrorists turns out to be more severe than we now expect. Last week’s 14% decline in the Dow industrials was comparable to the one that took place after the Nazi invasion of Holland, Belgium and Luxembourg in 1940. It’s sobering to read what happened to stocks in 1940 and thereafter, particularly after the Dec. 7, 1941, bombing of Pearl Harbor. War brought the destruction of important export markets, distortions in the domestic economy, shortages, a vastly expanded role for government, heavy taxes and the sacrifice of plans unrelated to the war effort.
The Wall Street Journal’s William F. Kerby put it this way in a front-page article the day after Japan bombed Pearl Harbor:
“The American productive machine will be reshaped with but one purpose – to produce the maximum of things needed to defeat the enemy.
““It will be a brutal process.
““It implies intense, almost fantastic stimulation for some industries; strict rationing for others; inevitable, complete liquidation for a few.”
Damage to stocks went across the board. The U.S. companies that were exhibiting new products at the World’s Fair in New York City when Hitler invaded Belgium saw their stock prices fall an average of 26% in the month after the attack. RCA, for example, which had just developed a large-screen television, fell from $6.50 to $4.25; after the attack on Pearl Harbor, it dropped to 3. Not even “war baby” stocks such as U.S. Steel, Curtiss-Wright, Lockheed and North American Aviation could manage sustained gains in those troubled years.
We don’t think the primitive theocratic totalitarians of our day are capable of causing a comparable amount of trouble, as practically the whole world is united against them. With pessimism rampant, this is the time to buy, in our opinion. We will be putting our money where our mouths are and will keep you posted with the results.
At the time of publication, neither Victor Niederhoffer nor Laurel Kenner owned any equities mentioned in this column. |
