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Thursday, December 12, 2013 - 13:00

Which Of This Year's 'Dogs' Can Bounce Back in 2014?

Thursday, December 12, 2013 1:00 PM

It may seem like a long time ago, but the epic stock market meltdown of half a decade ago is again worth pondering.

From around 1,300 in August 2008, the S&P 500 Index plummeted to 1,100 by late September and below 900 by the end of November. By the time we hit bottom in March 2009, the index had tumbled below the 700 mark. A nearly 50% plunge in just seven months is virtually unprecedented.

Now, with the S&P back up to around 1,800, we've seen a five-year rebound that should make us all quite thankful. This year has been especially fruitful, as the S&P 500 has tacked on more value this year (on the basis of market cap) than in any year in its history. The market hasn't even needed any breather this year on its path to record heights.

S&P 500 By Quarter

But such success can breed hubris. As Warren Buffett said back in 2011, "Once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits but simply to the fact that it seems a mistake to be out of stocks."

I've been pondering the flip side of that notion: In a year when so many investment angles have brought success, which approaches are not working? And more to the point, do any of these out-of-favor stocks and industries hold the potential for a solid rebound when the market rotates?

That isn't a call to sell all stocks, but it is a call to take a very deep look at what is working for investors. The factors that have sent many stocks sharply higher this year can also reverse, and simply holding on to your winners may carry great risk when the market's key themes change.

To answer that, I looked at the 1,500 stocks in the S&P 400, 500 and 600 to find the worst performers. Fully 32 of them have fallen at least 25% in 2013, with some of those losing up to 75% of their value. A closer look reveals deep distress in certain industries. Commodity stocks, for example, have taken it on the chin. From copper to iron ore, from coal to potash, and from silver and gold, the plunge in commodity prices has decimated many stock charts.

It's hard to see how coal miners have any upside in coming years, with both natural gas and clean energy set to take market share. And it's still not clear what catalysts will emerge to re-ignite gold and silver prices (short of a re-emergence of inflation). But I defer to my colleague Dave Forest with this group. His Junior Resource Advisor newsletter is a great source of deep values in this distressed asset class.

And investors made little money with retail stocks. Many retailers shed some value in 2013 as consumer spending has slowed to a crawl in recent months, and some of them have taken it especially hard.

The teen retailers in this group look like poor rebound candidates, as the field simply has too many stores chasing too few customers. But this is a good time to do more research on Perry Ellis (Nasdaq: PERY), which still owns a variety of enduring brands and now trades for around 11 times its recently lowered fiscal 2015 profit forecasts.

And I remain a fan of Francesca's Holdings (Nasdaq: FRAN), which I recently profiled on our sister site, ProfitableTrading.com.

These retailers, along with the commodity producers noted earlier, have some serious company. More than a dozen other stocks in the three various S&P indexes have slumped badly this year. Beleaguered insurer Tower Group (Nasdaq: TWGP) wins top "honors" after a yearlong bout of financial troubles.

I've taken a deep look at all of the stocks in this group, and in Part 2 of this series, I will be focusing on my top two favorite rebound candidates (among this group) for 2014.

Risks to Consider: Not all of these stocks have hit bottom. Coal producers, for example, had already posted dismal returns in prior years, only to fall yet lower in 2013. So it's crucial that you can identify the end of negative catalysts that have been in place for these stocks.

Action to Take --> When the crowd truly hates a stock, it's time to play closer attention. Roughly 18 months ago, few investors had much further interest in Netflix (Nasdaq: NFLX) after witnessing a one-year share price plunge from $300 to $60. But gutsy contrarians had the last laugh, as shares have rebounded more than 400% since then.

P.S. Are you terrible at knowing when to sell? You're not the only one. Fortunately, a former trust fund manager created a two-part blueprint that reveals when to sell... and when to buy. It's been 85% accurate for over four years -- and just closed out a 70% gain. Click here to access it now.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.