January 9th, 2013

Focusing on the Russell 2000 Index

imageAmong the investments in my My Model Portfolio, there’s one Index ETF: the 3x leveraged Russell 2000 ETF.  What has intrigued me over the past several weeks about this ETF is that it continues chugging along, moving higher with no little recognition of the difficulties the S&P 500 is having in matching its all-time high water mark of 1576, let alone being able to cross above the more immediate 1465 resistance hurdle.

While the S&P 500 just barely nudged above its Tech Bubble high with an 85% rise from the 2003 low to the peak just before the Financial Crisis/Great Recession bear market crash in 2007-2009, the Russell 2000 was able to appreciate around 145% over the same period.  Likewise, the S&P 500 Index rose around 114% from the bottom of the Financial Crisis Crash in 2009 to the 2012 high while the Russell 2000 appreciated around 135% to yesterday’s close (click on image to enlarge).

Russell 2000-S&P 500

As they say, past performance isn’t a guarantee of future performance.  But a comparison of the two indexes since 1991 reveals that there’s something more going on here than external economic and financial cycles.  And I believe the answer rests in the stocks comprising both indexes.

Most importantly, the stock with the largest capitalization in the Russell 2000 currently is Ocwen Financial Corp., a savings and loan coming in at $4710.0 million.  The stock at the bottom of the list of 2000 stocks with the smallest capitalization is Ventrus Biosciences Corp weighing in at just $31.0 million.  By comparison, the S&P stock with a capitalization of around $4700.0 is Robert Half Inc.  Not insignificantly, RHI ranks 438th out of 500; in other words, 87.4% of the stocks comprising the S&P 500 Index (or 437 stocks) are larger than even the largest of the Russell 2000 stock.  Not one stock in the Russell 2000 is large enough to be ranked above any of the bottom 62 of 500 stocks in the S&P 500.

To avoid significant liability resulting from a mad rush on a limited supply of stock, Cramer and the rest of the Talking Heads you hear in the business media of necessity might push “best of bread”, large-caps, performance over the past years including the secular bear market suggests a better strategy if you’re looking for some capital appreciation … albeit with more volatility.  Now that we may be at the cusp of some significant upside market action when the debt ceiling “crisis” passes, the place to look for stocks with significant upside potential is among those in the Russell 2000 Index.

Alternatively, if you just want to add some juice to your less risky, mid- to large-cap collection of individual stocks, include a small amount of IWM, the Russell 2000 ETF or UWM or URTY the 2x and 3x leveraged equivalents.  There are also a wide variety of slices of these 2000 stocks if you want to zero in on only the value, growth and mid-cap or small-cap components of the Index.  In sum, variants of the Russell 2000 could be an easy way to capitalize and maximize on any underlying market action.

January 5th, 2010

My Top-15 List of Low-Priced Stocks

Mark Hulbert had a piece in this past Sunday’s NYTimes entitled “What the Past Can’t Tell Investors“. I usually find Hulbert’s articles very interesting but a headline like that obviously really caught my attention. Hulbert studies the research and summarizes the findings as follows:

“the market’s performance in 2009 doesn’t increase the probability of a net gain in 2010…..while growth stocks this year may very well continue to lead the market, whether they do so won’t be determined by their 2009 performance…..One exception to this general pattern involves the relative performance of small-capitalization stocks, which over the last 80 years have shown some modest persistence from year to year…..the persistence of small caps’ relative strength bodes particularly well for the sector in 2010, because the average small-cap stock handily outperformed the average large cap last year…..this weathervane points only to relative, not absolute, performance. Small caps could lose money in 2010 and still outperform their large-cap brethren.”

It’s fashionable for bloggers, magazines, newspapers, newsletter writers and business media to lists of stocks of one sort or another. For example, a Google search of the expression “list of stocks for 2010″ produces over 31 million results. The first page of 30 includes the following:

  • lists of the “best” penny stocks,
  • BloggingStocks.com has their list of the 10 best value stocks for 2010,
  • Mark Hulbert of Marketwatch.com published his list of 10 stocks that are going to bounce in 2010.
  • Zacks publishes a list of what they believe are going to be the ten best stocks of 2010
  • Jon Dorfman of Business Week put out his list of 10 “casualty” stocks, those that were badly beaten up last year and have an opportunity to rebound in 2010.
  • Yahoo! Finance has their list of 10 high-yield stocks and there is even
  • a list of stocks with “negative equity value”, whatever that means.

With all these lists floating around, why produce another one? For no reason that it’s fun playing “what if”s”. For example, last March I challenged a friend who was very conservative with his investments by creating a mock portfolio of low-priced stocks for him. I had been watching the ticker at the bottom of the CNBC screen and was amazed at the number of familiar and favorite symbols crawl across at such low, mostly single digits prices.

It was a few weeks before the crash bottom in March 2009 and I called it my “perpetual call options” strategy. The mock portfolio consisted of 15 stocks chosen at random on February 1, 2009 with an investment of $200 in each for a total of $3000 (the amount chosen was completely arbitrary; the only condition was that each stock would have an equal dollar investment).

So how did that porfolio perform? While the market, as measured by the S&P 500, increased by 28%, this portfolio of 15 stocks increased by nearly 100%. The original $3000 would have grown to $5954 in 11 months as of Monday.

I understand that 2009 was an unusual year but it’s instructive nevertheless. It was the beginning of the recovery and you could have thrown darts and hit nearly any stock that produced significant gains 11 months later. Every stock had been beaten down and would most likely recover. There was a risk that one or more of the stocks in the portfolio might have failed and their value dwindle to nothing but the price appreciations among the remainder would have more than compensated for the losses.

February and March of 2009 were the beginning of the accumulation phase of the market’s life cycle. After the May-August correction, the market moved into the Mark-up phase of its life cycle. In the early stage, all that was required was sufficient confidence to throw money at the market. The Mark-up phase, however, takes some real stock picking. [I believe we're far away from the final bull stage called the Distribution Phase, where institutional investors pass their shares onto smaller hands in anticipation of the final bear market liquidation phase.]

But Hulbert’s comment about the advantages of small-cap converged with the seasonal flood of top-10 stock lists and encouraged me to put together another mock portfolio that might work again. The rules are:

  • $200 (or any other arbitrary amount) equally invested in
  • stocks selling less than $10 that
  • appear to be on the verge of completing a reversal chart pattern
  • appear to be showing some upward momentum (favorable moving averages trends) and
  • are fairly actively traded.

Again, I arbitrarily and randomly selected the stocks. I made no attempt to perform any fundamental analysis so there’s a high likelihood that one or more of these stocks might not make it to the end of 2010. This is a high risk game, an experiment, something that shouldn’t be attempted by anyone unless they understand that it’s as risky as throwing dice or playing the roulette wheel. The stocks in this hypothetical, low-priced stock portfolio were:

Can a basket of low-priced stocks beat the market average in the market’s middle, mark-up phase? Find out on January 5, 2011.