September 02, 2003

September Loser File: A Short List of Potential "Under performers"

Okay, so by now you've seen the quote from the Reuter's article about how horrible September is. If not, here it is: History shows September is the biggest loser for the Dow Jones Industrial Average, S&P 500 and Nasdaq indexes. Stocks fell in 33 of the past 52 Septembers. The biggest monthly percentage loss for the Dow Jones industrial average occurred in September (43 percent) as did the biggest monthly loss for the S&P 500 (27 percent), according to The Stock Trader's Almanac. The average move for the Nasdaq index in Septembers from 1971 to 2001 was a loss of 26 percent. And then there's this chart from the good folks at ArbResesarchrch which it makes it even clearer... DANGER! FALLING STOCKS! You can describe the process of generating an investment idea with two questions. First, "What?" Second, "So what?" You've got the what. September is a bad time for markets. And since this a cyclical bullish rally in the midst of secular market, answering the "So what" should tell you, at the least what NOT to own. And if you see any patterns, it can also give you a few new investment ideas. Let's look at the top ten performing stocks this year that have market caps over $400 million. That's an arbitrary number. But it does help us sort out the outlier small cap stocks whose outperformance this year doesn't tell us much about whether there's a class of stocks with a lot to lose from a correction. And that, by the way, is what we'Re looking for. Is there a particular sector that gained the most the re-exuberance? When we find it, THAT's the sector to attack. Here are the top ten performers year-to-date, ranked by market cap: 1. NTL Incorporated (NTLI), up 712%, market cap: $2.04 billion 2. XM Satellite Radio (XMSR), up 409%, market cap: $1.69 billion 3. Sonus Networks, Inc. (SONS), up 609%, market cap: $1.59 billion 4. NII Holdings, Inc. (NIHD), up 432%, market cap: $1.29 billion 5. Ask Jeeves, Inc. (ASKJ), up 611%, market cap: $807 million 6. Millicom Int’l Cellular, (MICC), up 648%, market cap $654 million 7. Dot Hill Systems (HILL), up 431%, market cap: $535 million 8. Westell Techonologies, Inc. (WSTL), up 567%, market cap: $531 million 9. Flamel Technologies, S.A. (ADR), up 554%, market cap: $460 million 10. Verso Technologies, Inc. (VRSO), up 740&, market cap: $403.2 million Not hard to see the common threads here...disk storage, broadband, packet-based switching, satellite radio, communications. This is Tech Boom, Episode Two. Shouldn't surprise you. Nor should it surprise you that five of these stocks don't have P/E ratios, because they don't have any earnings. Yet they all are up nicely, and so are the industries they represent. Take a loot the chart below. It shows the Internet architecture holders up 37% in the last 52 weeks. Not bad. Broadband holders are up 54%. The most diverse basket of Internet stocks--the Internet holders--are up 118% in the last year. And Internet infrastructure stocks are up 136%. All this while the S&P is up just 16% in the last year and the Dow up 13%. FOUR STRONG SECTORS WITH A LOT TO LOSE FROM A BEAR MAULING If you're looking for stocks to UNDER perform, or just get shellacked in September, I'd start with the 10 stocks on my list above. But if you're looking to make some money out of it, I wouldn't bother shorting any of them. I'd go after the holders--the baskets of stocks. They have leverage on both the upside and the downside. And because they've gotten so far ahead of the broad indexes on the way up, they'll give up the most ground on the way back down. Incidentally, none of the stocks on my top ten best-performers are holdings in any of the holders I've mentioned. And this is a point worth making: when stocks rise for no rhyme or reason, there's no intelligent way to about selecting them. What would you look for? Not value. You'd look for the stocks participating in the mania. And even then, if you're picking single stocks, you could be wrong. But what you DO no is that when they come back down, they'll come down hard. And on the downside, you don't have to take the risk of shorting individual stocks. You have the luxury of hindsight. In this case, you can clearly see that it's a handful of technology sectors that benefited the most in the last year. To profit on the downside, you simply buy put options on proxy indexes--baskets of stocks which represent that sector. You've targeted the idea and lowered your risk a the same time.


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