Did I miss something, or have we recently emerged from the market's bottom?
We can't be sure just yet, but investors in ICICI Bank (NYSE: IBN), Fifth Third Bancorp (Nasdaq: FITB), Lincoln National (NYSE: LNC), and Genworth Financial (NYSE: GNW) are likely convinced -- each of those stocks is up more than 50% over the past month!
But some analysts, like Nouriel Roubini, believe this rally will be short-lived and that stocks still have further to drop.
It's safe to say that negativity still abounds
The late Sir John Templeton called scenarios like we've been in "points of maximum pessimism." He also taught that times of maximum pessimism are the best time to buy -- and he practiced what he preached.
When the second World War began and stocks started to fall, he borrowed $10,000 and invested it in 104 companies whose shares were trading for less than $1 -- including 34 that were in bankruptcy. Four years later, he sold his positions for $40,000, booking a 300% gain on stocks the market thought were doomed.
With his example in mind, I believe the pessimism still lurking around continues to signal a buying opportunity.
Stocks to profit from pessimism
We should be buying stocks that, like Templeton's initial bet on pessimism, could become double- or triple-baggers in the four or so years coming out of this bear market.
We know the top stocks since the last recession began were mostly small caps -- albeit with a few mid-cap rock stars like Apple mixed in. Among other things, small companies can more quickly and efficiently cut costs and streamline operations than can larger companies with employees and resources scattered throughout the country and the world.
But what kinds of companies have outperformed since the end of that bear market? I ran a screen to see what kinds of companies were double-, triple-, or even-better-baggers as the recession receded. And sure enough, the best-performing companies over the following four years were all small caps:
Company
4-Year Return
from Oct. 9, 2002
Oct. 9, 2002 Market Capitalization
(in millions)
AmericaTower
5,137%
$139
YFP
2,857%
$434
Research In Motion
2,422%
$705
Bancolombia
2,067%
$203
WESCO International
2,054%
$142
Corning
1,890%
$1,173
Crown Castle International
1,830%
$373
AES
1,767%
$597
Coldwater Creek
1,670% Continued... |