With the market down some 35% this year, the question of the performance of companies that have been beaten down hard becomes very relevant. On the one hand is the conventional wisdom that those that are down will be sold hard in the remainder of the year to realize losses before the end of the service year. On the other hand is the well known effect for companies that are beaten down hard to rally during the first month of the year, in conjunction with a bounceback that in some years has been as much as 50% in the first month. There are so many variables involved in such a study that it is hard to do anything scientific. As a start, I looked at the NASDAQ 100 companies as of November 2007. They were down an average of 5% that year. I compared the performance in the next month of the 10 best performing companies to the 10 worst performing companies as follows:

Performance of 10 best and 10 worst in December 2007

10 best                                 10 worst

company dec 07 perf        company dec 07 perf

Top 10 / Bottom 10

mean 0.5                               mean  -1

The change in NASDAQ 100 for December 07 was -1%. There was thus, no significant difference between the performance of these companies in 2007 although there is some small evidence that except for LEAP, which was the worst in the first 11 months but the best in the last, that the 10 worst performed worse than the 10 best. There was survivor bias in this study since I worked with the performance of the current NASDAQ 100. Other studies one would want to see would be the performance of companies as a function of their goodwill to market value ratios. One would hypothesize that retrospectively those companies with high goodwill to market value ratios would have performed significantly worse than the average during the past several years as goodwill is prone to be valueless in a declining market. Also, with the performance of IPOs in the current environment one would hypothesize that their subsequent performance would be well above average. More studies of this nature are in order.

Michael Pomada writes:

Mr / Mrs DudeA quick & dirty study on the top and bottom 20 turkeys/non-turkeys in the sp500 from 1992-present. This is based on the sp500 membership list as of the beginning of each year, so it disregards changes intrayear, but is adjusted annually. Also, I only include stocks with px>$5, mktcap>$100MM & avg volume >100k shs/day as of November 30. I rank the stocks that meet these criteria on the last trading day of November and here I report the average return of those 20 stocks YTD, then Nov30 to Dec31, then Dec31 to approx Jan15.

So, bottom line,  the 20 stocks that have performed worst YTD shed on avg another -19bps while the best add 2.81% until the end of the year. This is then reversed during the first couple of weeks of Jan with the worst adding +2.59% and the best only adding +40bps.

WORST20 TURKEYS    AVG     SD   CNT        WINpct   Zscr        Zdrft
RETjan-nov30           -43.54   16.66    16            0.00%  -10.45

RETnov30-dec31        -0.19     5.65    16            56.25%  -0.14     -1.00

RETdec31-jan15          2.59     11.38   16           62.50%    0.91      0.89

BEST20 TURKEYS       AVG    SD      CNT         WINpct  Zscr        Zdrft
RETjan-nov30           99.21   38.06     16          100.00%   10.43

RETnov30-dec 31      2.81       5.50     16           68.75%     2.04       1.15

RETdec31-jan15        0.40       5.77     16           56.25%     0.27       0.24

S&P                              AVG    SD       CNT          WINpct   Zscr
SPRETnov30-dec31    1.22     2.95       16            75.00%    1.66

SPRETdec31-jan15     0.05     2.70       16            56.25%    0.08

The 20 worst turkeys on the menu this year: ticker and retYTD:

20 Worst

It must be noted that the "best turkeys" list will always be skewed by pending acquisitions — particularly in a year such as 2008 when most stocks are down YTD. One would need to exclude these stocks. Also, inevitably the resulting portfolios will be heavily exposed to particularly industries (like financials, oil & construction stocks this year) which changes the risk profile of the portfolio such that the S&P is not an accurate comparison for the drift.



U.S. Hedge Fund Seeks Investigator to Shadow Bosses

Dec. 23 (Bloomberg) — Chapman Capital, a Los Angeles- based hedge fund, is seeking a private investigator to monitor the private lives of company executives, the Financial Times said, citing a job advertisement on a New York Web site. Robert L. Chapman, who runs the fund, is known for writing blunt letters to companies and has warned in the past he would use covert intelligence, the newspaper said. “Understanding what is motivating executives of underperforming companies is a big part of our efforts,'’ the newspaper cited Chapman as saying in an interview.

He could come up with a weekly point system:

Week 28:

-3 Monday golf during work day with drinking buddies
-2 Two-martini lunch Wednesday
-15 Affair during working hours with employee Friday

Week 28 total: -20, Cumulative: -768, Recommendation: Sell short



One of the key chapters in price theory books such as Price Theory and Applications by Peter Pashigian, is on the pricing policies and resulting profits for companies, which are based on the degree of competition they face, the elasticity of demand for their products, and their durability. One important conclusion is that the more differentiated a product is, and therefore less competition it has to contend with, the greater that company’s profit margins. The basic theorem initially being that all firms price where the extra unit of revenue equals the extra cost incurred by the production of one more unit.Other conclusions are that the lesser the degree of competition, the more inelastic is the region in which the company prices, i.e. demand will be less responsive to any given price increase. Increases in demand for firms that do not face much competition increases their profits in the short run, and may do even more so in the long term when plant size can change to accommodate the extra demand. Cost innovations are also very profitable for such firms.

Since profit margin serves as a proxy for how differentiated a company’s products and processes are relative to its competitors, I thought it might be helpful to have a list of companies classified by profit margins. Note that the high profit margin companies all tend to trade at a much higher p/e than other companies, however, the basic economic model shows that companies that face many competitors will have their profits reduced to the point of the risk free return — so this is to be expected. Any studies on profit margins versus stock market return would be interesting.

Thanks to Mr. Dude Pomada, who is soon to tie the knot, for the following calculations.

Here are the Dow 30 companies, based on the previous 12 months both operating margin & profit margin, sorted by profit margin:

DOW30    Oper Margin    Profit Margin
MSFT        37.20         28.45
INTC        31.46         22.31
KO          26.13         21.09
MRK         27.51         21.04
JNJ         26.47         20.61
C           24.46         20.44
PFE         29.90         15.76
AXP         18.68         15.39
MO          25.14         15.14
MMM         23.66         15.11
PG          19.42         12.73
MCD         19.52         12.72
GE          15.07         11.05
XOM         14.93         11.01
T           14.06         10.91
JPM         19.40         10.62
VZ          19.02          9.85
AIG         20.82          9.62
IBM         10.29          8.71
DIS         12.86          7.93
CAT         10.41          7.85
DD           8.07          7.71
UTX         12.13          7.18
HD          11.49          7.16
HON          8.97          5.98
AA           8.15          4.71
BA           4.02          4.69
WMT          4.90          3.59
HPQ          5.72          2.77
GM          -7.30         -5.49

Peter Gardiner comments:

A direct comparison of profit margins (without adjusting GAAP statements) may be quite misleading, as for example r&d for a software company like Microsoft, or advertising for a consumer products company such as Proctor and Gamble is expensed, while the massive capital expenditures required for, say Intel, are amortized. The amount of net invested capital required to produce $1 dollar of revenue, or $1 of pre-tax income may yield a differently ordered list.


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