The Mini Ride of the Phoenix

I have written often about the Phoenix effect, or the profit potential of holding low-priced, beaten up and near-bankrupt stocks in a bullish recovery. Bespoke recently documented an example of the performance of such a basket here.

When the Phoenix does finally rise, the upside potential for a portfolio of such stocks is a triple or more. However, I wouldn’t rush out and buy them yet. Wait for a market rally and a re-test of the recent lows before buying in. I would expect that re-test to occur in the next few months.

Comments

[keithpiccir...:]

Dr. Hui,
Thanks for the article about The Phoenix Effect, it is a term I rarely hear, and seldom see.
Perhaps the best way the individual investor could reap these benefits would be to make an initial entry, or a switch into an existing no load small cap mutual fund with an initial entry and then monthly amounts in ever increasing amounts over a 3-4 month period.
It would be very difficult for the layman to perform so much fundamental analysis and even if one could, the metrics in our current environment with so many stain glassed windows would make these on-the- brink" businesses masquerading as stocks, nearly indiscernible from each other. As TraderMark has pointed out, they mimic each other like twins.
Timing rarely works, but if the BankIndex (KBX) , Vix, Libor rates, housing rate hope, and infrastructure spending are all in improving and accelerating modes, perhaps this is how to catch the Phoenix effect from the recent market lows.
Most of us have so much committed and re-committed at a loss, perhaps the re-test entry point needs to be 7500 Dow, and 750 S & P.
I squinted, and missed the infrastructure moves of Nov. 10 when the engineering firms like JEC, FWLT, FLR and their brethren rose like a beaming sun facing east.
My triggers are now daily readied for that next big drop when it comes.
I cannot gauge the sector or countrie(s) I believe will likely lead us out of this. One would think it would be the money centers but this is not certain with so much government involvement.
I tend to believe owning emerging markets, and Asian stocks would be the most rewarding strategies in the next quarter or two.
As Roubini has said, we are a nation of first consumers and first debtors, but will now have to become a nation of last consumers and last resort debtors, savers, and producers of something sustainable.
It saddens me to see how we demanded so many short lived disposable products from world markets, that ended in recycling centers, or worse, landfills.
The supply/demand shift paradigm is being made to the BRIC countries as the world will become more realigned with economies of scale and more global "evenness".

2008 Dec 04 09:36 PM

[Old Trader:]

Dr. Hui,

Not quite up to your usual standards. Normally, I eagerly look forward to your posts, but this one was not as helpful as many/most previous ones have been. Are you suggesting we're currently in the "rally" phase, prior to the re-test, or are you thinking there's more to go on the upside yet before the re-test comes? I've seen more than a few fairly reputable pundits calling for something around 950-1000 as a "top" of this bear rally...somewhere around 9k-9500 on the Dow (although I really only follow/care about the S&P).

2008 Dec 05 12:39 AM

[James Wilson:]

BCS has so many high stakes in many many companys I don't see how the stock stays down so low. BCS should be a $60.00 stock if any are.

2008 Dec 05 06:44 AM