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Posted 6/21/2001
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The Speculator
5 high-priced stocks ready to shoot skyward
The market wildfire has started the great cycle all over again. Now that cheap stocks are thriving, expect pricier ones to flourish later this year. Here are our favorites.
By Victor Niederhoffer and Laurel Kenner
During succession the height and mass of the vegetation increases. …The order in which the groups of species achieve dominance and the species competition of the climax which is ultimately formed is predictable and repeatable.
-- T.J. King, "Ecology"
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Low-priced stocks with poor Value Line rankings were the top performers through the first six months of 2001. But in the second half, pricier stocks with earnings momentum are likely to take the stage.
The progression of small to large resembles the recovery of a forest after a fire. The plants vary from place to place, but the process follows a similar path. Initially, grasses, weeds and herbs flourish, regenerating the soil and preparing the ground for the later stages. In a year or two, tree seedlings come up. Bushes appear, crowding out the grasses. Pines shoot up, blocking the bushes' sunlight. The climax comes when a woodland is established.
A similar process started the year in the market. As we reported in our June 14 column, the lowest-priced tenth of stocks in the Value Line universe rose an average of 82% in the first five months. Our most recent studies, again conducted jointly with Tom Downing of Value Line, suggest that the lowest-price stocks can be expected on average to be the worst for the rest of this year, while the highest-priced stocks will be best.
We emphasize that we studied price levels, rather than total market capitalization; thus, "small" companies don't correspond to small plants in our hypothesis. A number of companies with market caps exceeding $5 billion are trading below $10 a share now, particularly in the telecom sector.
A table listing the correlation between price and next quarter's price appreciation, from 1990 to date, appears below; more than 50,000 company quarters are included in the calculations. The negative correlation for the first quarter shows that the higher a stock's price at the beginning of a quarter, the worse the performance in that quarter; the lower the price, the better the performance. The positive correlations for the third and fourth quarter show that in the last half of the year, the higher the price the better the performance; the lower the price, the worse the performance.
(The correlation coefficient is a number between -1 and 1, with numbers close to -1 showing a strong inverse relation and those closest to 1 showing a strong positive relation. If they move together 100% of the time, the correlation would be 1. If they never move together, the correlation would be -1. If they move together 50% of the time, the correlation would be zero. So a correlation of 0.10 would indicate the two move together 55% of the time.)
| Calendar Quarter | Correlation of price at close of prev. qrtr. to price chng. in qrtr. |
| 1 | -0.09 |
| 2 | 0.00 |
| 3 | 0.05 |
| 4 | 0.08 |
In a separate study, we found that Value Line's timeliness rankings, based largely on earnings and price momentum over six months, work better in the last half of the year. For example, the top-ranked "Group 1" stocks rose 9%, on average, in the second half for the last nine years, versus only 7% in the first half. Similarly, the stocks with the poorest rankings -- the "Group 5" issues -- declined 2% in the last half, compared with a rise of 3% during the first half.
Regrettably, the predictive values of price and timeliness rank, by themselves, are not significant enough to be practical. However, a combination of the two second-half tendencies -- the better performance of high-priced stocks and the improved efficacy of Value Line's timeliness rankings -- gives us hope.
Having illuminated two statistical effects and measured their significance, we can speculate about why the effects exist. We think that just as larger plants grow faster at later stages in forest succession, higher-priced stocks with earnings momentum also will grow faster as the market succession proceeds.
In both forests and markets, the later stages can't come if the earlier stages haven't prepared the ground. After fire destroys a forest, fast-growing grasses and shrubs are a necessary precursor to trees; but when trees appear, the days of the small plants are numbered. Similarly, a good performance by low-priced stocks provides hope and capital gains so that higher-priced stocks can become dominant.
That's our hypothesis, at any rate. And it leads to more predictions, and thus the process of science and making money advances.
• 20 stock speculations in time for summer, 6/14/01
• Slicing and dicing to find Nasdaq’s best stocks, 6/8/01
• A long, hard summer ahead for investors, 5/31/01
more...
| Company | Price 6/19 |
| Enzon (ENZN, news, msgs) | 64.50 |
| IDEC Pharmaceuticals (IDPH, news, msgs) | 70.00 |
| Express Scripts (ESRX, news, msgs) | 106.37 |
| Lowe's Cos . (LOW, news, msgs) | 75.96 |
| NVR Inc . (NVR, news, msgs) | 143.00 |
At the time of publication, neither Vic Niederhoffer nor Laurel Kenner owned any stocks mentioned in this column.
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.