I was looking at a portfolio that I manage and was struck by some of the metrics. While the account is up over 20% YTD (it is balanced 60/40 Stocks and Bonds), the current median equity return YTD for the 14 stocks in the account is -11%. Long story short, I have had a lot of turnover this year and have picked up some stocks, especially in the Healthcare sector, that have lagged over the past few months or even quarters. As always, I disclose these holdings on my website.
This morning, I decided to look purposefully for stocks that are down this year after having a strong relative year last year. There are lots of reasons to be out of sync with the market, but sometimes it's just mean reversion at play. I took the Russell 3000 and found that 22% of the members are down over 10% this year. Of that group, 253 were down less than 10% in 2008. I wanted to make sure that these were companies with good balance sheets (net debt to cap <0) and earning profits (PE <30), so I constrained those areas. I also decided to kick out any stocks down 40% or more this year to avoid stepping into a falling knife situation. Here is what I got, sorted by sector:
As you can see, most of these companies are relatively small. From my own experience with a few of these names, they are good companies but they should have fallen more last year. Perhaps they benefited from fundamentals being slow to deteriorate, or perhaps they were just the beneficiaries of crowding in and momentum due to lack of downside or perceived upside. In some cases, the bad news certainly came late. In any event, the smaller the stock, the more likely it is to diverge from equilibrium, so it's good to see so many small-caps make this list. It's also interesting that 7 of the 10 economic sectors are represented.
I am familiar with several of these companies, some intimately. I just updated my 100-member Watchlist, and 8 of these companies are ones I follow closely. A portfolio that I manage owns 5 of these names, including Aceto (NASDAQ:ACET), Met-Pro (NYSE:MPR), Martek (MATK), Synovis Technologies (NASDAQ:SYNO) and EZCORP (NASDAQ:EZPW). Each of these is also in my Top 20 Model Portfolio, which is up almost 40% YTD, and ACET and MPR are also in my Conservative Growth/Balanced Model Portfolio. EZPW is the only one that I have held the entire YTD, adding to the position in the model after the recent pre-announcement despite having a large weighting already.
I have written about some of these, including MATK earlier this month. My purpose today isn't to judge any or all of these stocks individually, but rather to suggest that in many cases we will find that the price action is less about valuation or fundamental changes as opposed to pure supply and demand changes. Just as I don't understand why some folks were running these stocks up or holding them from falling last year, in many cases the valuations and fundamentals for these companies prospectively look fine. Perhaps the sellers are restructuring their portfolios to be more aggressive (more cyclicality or more financial leverage). At a time when the market is running up beyond the expectations of many (including me), it wouldn't surprise me to see folks looking to play catch-up take a look at some of these. While not all of these will work, I expect that there are several here worth considering.
Disclosure: No personal position in any securities mentioned, but long ACET, EZPW, MATK, MPR and SYNO in a charitable foundation I manage as well as in one or more model portfolios.