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Wall Street, California | STREET STRATEGIES

For Picking Winners, Nix the List

Best Stocks of '97 Could Be Cellar Dwellers of the Future

January 06, 1998|WALTER HAMILTON | Street Strategies explores investment tactics. Times staff writer Walter Hamilton can be reached at walter.hamilton@latimes.com

If the end of one year and beginning of the next had to be known for just one thing, it would be for lists.

You name it, there's a list for it. There are lists of holiday foods to cook, cards to write and presents to buy. And, of course, there are lists upon lists of New Year's resolutions.

Then there are the lists of stocks that gained and lost the most during the previous year.

They're in seemingly every newspaper. In the last few days, major national and financial papers such as the Los Angeles Times, Wall Street Journal and Investor's Business Daily all had them.

Scanning the lists is natural for many investors. They hope to see one or two stocks they owned (if they're looking at the winners list, that is) and probably wince at the sight of a few more they wish they'd bought.

But active investors peruse the lists for another, far more serious reason. They're prospecting for stocks to buy and figure the lists might turn up some clues.

"Wouldn't we all love to find that magical shortcut?" said Hugh Johnson, chief investment officer at First Albany Corp.

So do these lists actually help the savvy investor mining for stocks? Well, uh, no. In fact, they're virtually useless when it comes to helping investors identify promising issues.

Momentum investors might think the best performers one year would carry through to big gains the next. On the other hand, value players might think that some plunging stocks are so low they can only go up.

That logic is so compelling that some investment pros use this strategy.

At the request of a well-known manager at a big mutual fund company, Johnson decided to examine the issue a couple of years ago.

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Instead of looking at individual stocks, Johnson set out to determine whether the showing of broad industry groups in one year foreshadowed their performance the next. He figured the forces that moved a group would persist. And if they did, he could then pick out the best stocks within that group.

His conclusion?

"I did not find past performance in any given year helps with [estimating] performance in the next year," Johnson said. "It just does not work."

For proof of that, look at the accompanying chart to see how the best and worst stocks of 1996 fared in 1997. (The list is limited to higher-priced stocks.)

Of the top 19 stocks in 1996, 11 declined last year. And they didn't just skid. The single best of those 11 lost one-fifth of its value; the three worst lost about two-thirds of their values. Of the 20 worst stocks in 1996, 11 fell last year. It's almost a shame that more didn't fall. Then, you could think about shorting both lists.

The Times each year lists the top stocks in various price ranges. In the 1996 list (which appeared in early 1997), Saba Petroleum was the fifth-best in a group priced at $25 or more.

For 1997 though, Saba Petroleum nearly made it on another list--the biggest losers. With its 66% plunge, Saba barely missed making the losers list, which cut off at a loss of 70.9%. (The lists for 1997 appeared in Sunday's Business section.)

All this is not to say that winning stocks don't come from lists of both winners and losers. For example, Cablevision Systems was a big loser in 1996 but performed well in 1997, rising 213%. UTI Energy was near the top of The Times' 1996 winners list and rose an additional 119% in 1997.

The problem, though, is that there is no pattern, experts say. In other words, there's no way to know if a stock will turn out to be a UTI Energy or a Saba Petroleum.

"Usually, stocks that have performed the worst don't come back," said Scott Bleier, chief investment strategist at Prime Charter Ltd., a New York investment bank. "And stocks that have performed the best may be expensive by the time you look at them."

Most of the issues that make the lists are small-cap stocks whose prices can swing wildly from one year to the next, Bleier said. Investors tend to get excited about them all at once only to bail out at the first sign of trouble.

"They're more speculative," he said. "When they disappoint they generally disappoint big, and when something good happens, it 'makes' the companies, so to speak."

Apply that reasoning to three of the top eight performers in The Times' 1997 list of winners. The three--Mindspring Enterprises, Yahoo and Lycos--are all Internet-related. And given the shifting sands of the Internet business, it's more than conceivable that those stocks could show up on a winners--or losers--list next year.

It's also important to remember that gauging a stock's performance over a calendar year has some inherent difficulties.

"There's nothing magical about Dec. 31," Johnson said. "What's more magical about Dec. 31 than, say, June 5? Trends don't just start at the beginning of a calendar year and finish at the end of the year."

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