Are 'Phoenix' Stocks Getting Ready to Rise?

With the US equity market averages either probing or breaking down through their November lows, is it time to buy Phoenix stocks? Others have picked up on that theme, with the latest being a Minyanville article on buying beaten up stocks.

With that in mind, I screened the US market for stocks with the following characteristics:

• Stock price between $1 and $5 (low-priced stocks)
• Down at least 80% from a year ago (beaten up)
• Market cap of $100 million or more (were once "real" companies)
• Net insider buying in the last six months (some downside protection from insider activity)

This screen gives us a list of low-priced stocks of Phoenix candidates. The $100 million market cap gives us some assurance that it was once a substantial company. The net insider activity gives signals that company fundamentals are less likely to completely fall apart. The screen, which showed a count of 30 stocks that passed the criteria a week ago, jumped to 48 names when it ran after the close on Monday 23 Feb 2009:

Affymetrix Inc (AFFX), Aircastle Ltd (AYR), Amkor Technology Inc (AMKR), ATP Oil & Gas Corp (ATPG), Bank of America Corp (BAC), BGC Partners Inc (BGCP), Boyd Gaming Corp (BYD), CapitalSource Inc (CSE), CB Richard Ellis Group Inc (CBG), CBL & Associates Properties Inc (CBL), Century Aluminum Co (CENX), Cenveo Inc (CVO), Citigroup Inc (C), Colonial Properties Trust (CLP), Conseco Inc (CNO), Delta Petroleum Corp (DPTR), Developers Diversified Realty Corp (DDR), Fifth Third Bancorp (FITB), First Industrial Realty Trust Inc (FR), Gannett Co Inc (GCI), Genworth Financial Inc (GNW), GFI Group Inc (GFIG), Global Industries Ltd (GLBL), Great Atlantic & Pacific Tea Co (GAP), Helix Energy Solutions Group Inc (HLX), Hercules Offshore Inc (HERO), Huntsman Corp (HUN), Insight Enterprises Inc (NSIT), ION Geophysical Corp (IO), Janus Capital Group Inc (JNS), Liz Claiborne Inc (LIZ), Marshall & Ilsley Corp (MI), MF Global Ltd (MF), MGIC Investment Corp (MTG), MGM Mirage (MGM), PAETEC Holding Corp (PAET), Patriot Coal Corp (PCX), Pennsylvania Real Estate Investment Trus (PEI), Popular Inc (BPOP), Protective Life Corp (PL), Quiksilver Inc (ZQK), Regions Financial Corp (RF), Reliant Energy Inc (RRI), Saks Inc (SKS), Sunstone Hotel Investors Inc (SHO), Tetra Technologies Inc (TTI), Wyndham Worldwide Corp (WYN) and XL Capital Ltd (XL).

I find it interesting that given the recent news on the weekend, both Citigroup (C) and Bank of America (BAC) are Phoenix candidates with positive insider activity, though insiders bought Citigroup earlier at substantially higher prices.

Phoenix: the bull case
Is it time to buy? Here is the bull case, based mainly on sentiment readings:

European pension funds are throwing in the towel and reducing equity weightings.
Brokerage firms are awash in cash.
The magazine cover indicator, always a good contrarian indicator, is flashing positive.
Bullish sentiment among individual investors is falling.

Phoenix: the bear case
Nevertheless, there are some troubling indicators out there:

CEOs aren’t buying their own stock.
AAII sentiment readings, while bearish (contrarian bullish), aren’t at bearish extremes. The chart below (click to enlarge) shows the bull and bear sentiment ratio from AAII. Note that while the market has fallen, sentiment readings aren’t as bearish as they were in November – a bearish divergence. By contrast, extreme bearish sentiment was in evidence when the market tested its 2002 lows in 2003.

Not oversold enough: Some of the proprietary overbought/oversold indicators that I watch (not shown) are not at oversold extremes.

Commitment of Traders data is leaning bearish: The latest weekly Commitment of Traders report, large speculators are net long S&P 500 futures with readings near (contrarian bearish) extremes. While they are net short NASDAQ 100 futures, readings are neutral.

Get long for a punt?

Putting this all together, my interpretation of the big picture suggests this isn't THE BOTTOM. Any rally from these levels is still a bear market rally.

While I wouldn’t recommend it, speculators could try to get long a basket of Phoenix stocks for a punt. If you do, then I would suggest that you manage risk with some tight stops in place so that the trade doesn’t totally fall apart on you.

Needless to say, this is an extremely high risk/high reward trade. This post is by no means a recommendation to buy Phoenix stocks. You are on your own on this one.

Comments

[Boon:]

No amount of past data analysis will help in trying to pick phoenix stocks, as almost every single one has its own unique circumstances. For me, the key questions when dabbling with stocks that have fallen from grace are:

1) Has management solved all the problems that caused the crisis in the first place? Is it starting with new management, or has its debt been lessened, or unprofitable aspects of the business been stripped away?
2) Are the products viable? Sometimes companies fail because their products are no longer competitive (e.g. General Motors), and no amount of restructuring or financial fixing will change its fate, it will only delay it, until its products are competitive again.

Feb 24 04:14 AM

[Nick Waddell:]

A tough stock picking environment, because recent history suggests at least one of these companies and maybe more will go out of business. A guess the question, then, is "Does buying a basket of ten Phoenix stocks make sense right now?".

Feb 24 01:09 PM

[miketbh:]

Me all out on XL.
My wife onto RF.
We are in for long haul, hope the pps today is 'the bottom'.

Nice to know they are a 'phoenix' stock. :)

Feb 24 01:23 PM

[Alan Young:]

The idea behind your screen is an interesting one. Although a rising tide lifts all boats, the boats with the lightest cargo might lift the fastest. It might be useful to add more criteria, perhaps something about debt/equity ratio.

The note about European pension funds is useful, but I don't know why you call it bullish. Capitulation by retail investors is bullish, but when institutional investors withdraw from the market, it seems to me that only makes prices softer. Eventually, this money may return, but who knows when?

Boon's point is well taken, too. Many of these companies won't come back because their product is no longer valued.

Feb 24 01:23 PM

[GoldMoney:]

Catch a falling knife and hope you don't lose a finger. Interesting strategy. Not for me, but good luck.

Feb 24 03:59 PM

[socphd71:]

Richard Collins -- The Chinese government has reduced the number of times a mainland resident can go to Macau or Hong Kong.

www.marketwatch.com/ne...

Feb 24 05:25 PM

[Stone Fox C...:]

AAII sure seems extreme to me. Its lower now then Oct/Nov last year. Being that its a survey, makes it difficult to vouch for the accuracy kinda like consumer confidence. There appears no signs in the market that investors are more bullish now then anytime in this bear market.

Feb 24 06:01 PM

[drone:]

What is this Phoenix thing? Are you trying to coin a term like BRIC that you hope will make you famous?

Feb 24 07:52 PM

[coloneldebu...:]

Here's how I do my "phoenix" stock plays.

Find a market segment that has been beaten down. Find the strongest players in that segment and right the wave up.

It worked for the airline industry after 9/11, LUV was very good to me in that case. I suspect there are several banks that could be played here, like BBT. I'm sure there are real estate plays as well.

Feb 25 10:14 AM

[User 362708:]

XL trades for less than cash+goverment securities it owns - everything else is free

Feb 25 01:40 PM

[aarc:]

Strategy with phoenix stocks is to buy them at divergence signal using MACD. Then selling half of the stock holdings after they made a reasonable bear market rally.

With the current volatility; prices of phoenix stocks can easily run up 2x to 5x in a few days or few weeks.

Reward to risk ratio is simply very high at this stage. Buying a $2 stock can easily run to $4 to $10 in a very short period of time due to selling fatique and/or short coverings. Downside risk is that those companies can go bankcrupt in 6 months to 1 year as they continue to burn their cash reserves through the downturn while the credit crunch is still in effect. Selling half the stock holding at $4 or $5 and holding the other half for long-term investment effectively gives you a "free" investment.

For example: UYG or double long financials is now trading at $2 and change from it's previous high of $72.96. Based on Elliott Waves analysis; there is a high probability it has already completed a 1-2-3-4-5 run to the downside with low probability $1.60 as the limit run just in case the downside goes into extended mode. The upside is that it can easily jump to $3.83 just on reaction bounce and $6.95 if bouyed by good news such as if and when the Treasury releases it's Banks Recovery Program. For now traders may already be starting to price in the BRP as the $BKX and UYG failed to produce a lower low on Monday this week while $SPX, $INDU and $COMPQ made new lows last Monday.

Selling at $3.83 half of anything bought at the low $2 levels and holding half for long term investment effectively makes your investment closer to zero while still providing you with half the shares that has a tremendous upside potential. This is more true with beaten down stocks of C and BAC than any other banks.

Feb 25 01:50 PM

[Thoroughly ...:]

Can anyone speculate on Affy?

Mar 06 11:33 AM

[Mad Hedge F...:]

We are way overdue for a big bounce. To say the market has gone mad is an understatement. The Dow has lost 24% since January 1, giving up $2.6 trillion in value. Other than that Mrs. Lincoln, how was the play? Credit default swap risk premiums now tell you that it is much riskier to invest in Warren Buffet’s Berkshire Hathaway (BRK/A) than Vietnam, and that Russia is a safer bet than General Electric (GE). The Dow is headed for the 4,000, according to ultra bear Felix Zulauf of Zulauf Asset Management in Zug, Switzerland. The rock star fund manager believes that we entered a 10-15 year bear market in 2000. He argues that analysts are smoking something with S&P consensus earnings forecasts at $60, down from $100 a year ago, and that the real number will come in at zero to $40. We may see one more bear market rally to 9,000 in the next few months led by financials, mining stocks, and consumer discretionaries. After that the Dow will drop by half. Day traders only need apply.

Mar 08 11:21 PM

[InvestBaboo:]

Thanks, Cam Hui! If the U.S. economy does the turnaround this year as I suspect this list of stocks may have some huge winners!

Mar 22 01:23 PM

[FreeMkts:]

Preferred stocks and debt of these types of stock are also interesting and pay very handsomely for those that limp along and survive without the stock recovering. HUN debt trades for 40 cents on dollar and they have $1 billion in the cash. Not sure if the stock will ever recover but that bond holder can do well with a lot less risk over the next 4-6 years. DDR preferred stock has a 30% current yield. Different strategies for survive versus thrive businesses. I would like to see more articles on how to play capital structure for various companies.

Mar 30 02:23 PM

[User 395537:]

Your might well be the dumb ass of the day.


On Feb 24 07:52 PM drone wrote:

> What is this Phoenix thing? Are you trying to coin a term like BRIC
> that you hope will make you famous?

Apr 15 07:41 PM