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March Madness: A Stock Tournament With an Uncrowded Winner


This group of "finalists" exhibited, for a variety of different reasons, serious relative strength.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

As a result of one of the stock tournaments we hold at my firm every week, I wanted to share an interesting fact on the "Bottom" anniversary party of opinions the day after, because I don't like crowds much.

I just asked our trusty database to show me any liquid US stock that was up since October 9, 2007. That was the day the S&P 500 closed at 1565. It's declined 27% since then. So this group of finalists exhibited, for a variety of different reasons, serious relative strength.

Regardless of what you think of the economy, monetary policy, inflation, or deflation, it seems investors all agree on at least a few things -- like the fact that the average consumer is in far worse shape than he was at the peak and well before the credit crisis dug him a far deeper hole.

It might be surprising then to learn the one sector with more stocks qualifying than any other is Consumer Discretionary -- and twice as much as number-2, Health Care (perhaps the second most agreed-upon group that new regulations were to doom). To be fair, there's one big caveat. To answer a few correct doubts about price action alone, and for those who share an unwillingness to overpay for it, I should mention what might be an even more surprising series of qualifying rounds we made these stocks fight through. Those finalists also had to be cheaper than the S&P on a Price to Sales and Price to Cash Flow basis.

As my friend Mike Santoli put so well the other day, the stock market is an argument about the future. This price action since the peak and over the valley severely contradicts the extrapolation that if the average consumer is worse off, that it must also mean Consumer Discretionary stocks cannot provide far-above-average individual opportunities.

My last check before we dig deeper into the "Finals" of any of our tournaments is always to glance around to make sure the arena isn't too crowded with other scouts. Sure enough, the group-think on the poor consumer has the average number of Wall Street analysts who follow each one of our qualifying Consumer Discretionary stocks at one-half as much of a crowd as an S&P 500 member receives.

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No positions in stocks mentioned.
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