Anticipate the V Ken Fisher, 01.22.09, 06:00 PM EST Forbes Magazine dated February 16, 2009
The stocks that got clobbered most late in a bear market are the most likely to do well in the early stages of the next bull market. This year has gotten off to a bad start, with the S&P 500 (as of Jan. 20) down 10.7% to 805. This just makes me more determined in my bullishness. I like stocks for 2009 precisely because they did so badly in 2008. Did we hit absolute bottom Nov. 20? Maybe, but I can't be sure; no one can be sure when a bear market is really over. Those who think they have some formula for precisely calling bottoms are fools. What I am pretty sure of is this: When the market rebounds, a lot of its gains will take place in a very short span (like two months or less), and people who are too cautious will miss most of these gains. Bear markets have been typically followed by bull markets in a V-shaped pattern. The steeper and bigger the decline, the sharper and bigger the subsequent bull move. The few exceptions to this pattern in the past century have involved the emergence of completely different bad forces than the ones that created and contributed to the bear market. For example, stocks rallied 324% from July 1932 to March 1937. After a recession-induced big bear market and partial recovery over the next 21 months, stocks encountered an entirely new kind of trouble in 1939. War in Europe sent the market down even lower than the recessionary low of early 1938. That could happen again, with the economic equivalent of an asteroid coming out of the blue. But, absent such a surprise, we should get the normal V pattern. Its upward swing will swamp any late-stage bear market vicissitudes as they always do. How were my results last year? In line with the market's--which is to say, not good. Starting with 1996, forbes' statistics department has prepared an annual accounting of each stock-picking columnist's picks versus the S&P 500. Over those 13 years my column has lagged the S&P 500 three times, and 2008 was one of them. The others were 1997 and 2002. During 2008 I recommended 57 stocks. Equal money in each of my picks when first published less a 1% haircut for transaction costs would have lagged equal amounts in the S&P 500 by 1.1 percentage points (without a commission haircut). That lag came from the first column (Jan. 28), which had my two worst stocks. AIG collapsed 97% because of losses on credit default swaps at a time when accounting standards demanded quicker recognition of such losses. Brazil's Aracruz Cellulose lost 84% as demand for its pulp shrank in the face of recession. My picks were a hair ahead of the S&P until Dec. 29, when Rohm & Haas shriveled amid fears (unfounded, it now seems) that Dow Chemical (nyse: DOW - news - people ) might not complete its takeover of this company. Despite this setback, Rohm & Haas was my best pick, up 36%. Other double-digit winners for me last year were NTT Docomo, the Japanese phone company; Logitech International (nasdaq: LOGI - news - people ), a maker of cordless pc devices in Switzerland; Repsol, the Spanish oil company; and Travelers, Wal-Mart (nyse: WMT - news - people ) and John Wiley & Sons. What stocks from last year's picks are still worth holding? An almost universal stock market fact that few know and you will likely not have read anywhere, ever, is that categories of stocks that fared better than the market in a bear market's first half but lagged badly in its later stages tend to lead the next bull market bounce and for a long time. History holds almost no exceptions to this. This group now includes energy, materials, industrials and consumer discretionary. So for this year I recommend carrying over eight of my 2008 picks. Four are in basic resources: Cameron International (otcbb: CMRN.OB - news - people )(21, CAM), Royal Dutch Shell (nyse: RDSA - news - people ) (47, RDS.A), Dow Chemical (14, DOW) and Arcelor Mittal (23, MT). There are two in industrial products: CNH Global (14, CNH), a Dutch firm that makes earthmoving equipment, and Textron (nyse: TXT - news - people ) (12, TXT), a diversified company that makes everything from golf carts to Cessna jets. Despite the recession, I recommend you stick with two of the consumer stocks from my 2008 roster. Mohawk Industries (nyse: MHK - news - people ) (35, MHK) makes carpets and Daimler (29, DAI) makes Mercedes cars. These two should do well on the right side of the V, which will begin for stocks a good 6 to 12 months before the economy hits bottom. Remember that the stock market is anticipatory. If you wait until the economic recovery is here, you'll miss most of the action on Wall Street.
