Stock Smarts: Three Strikes, Not Out!

The Dow, Nasdaq and S&P 500 indexes were all solidly lower in 2002 – a third straight down year for stocks.  That hasn't happened since just before World War II.
 
What's to blame? The list goes on, but you can certainly point to Usama bin Laden, Saddam Hussein and Wall Street scandals, the depths of which called into question the basic fundamental fairness of the markets.

So how is a third down year good news for investors?

Charles Payne of Wall Street Strategies says that 2003 will be the year of rebirth: rebirth in the markets, thanks to renewed faith from corporate housecleaning. A rebirth in the economy, which he feels will come in the form of a Presidential Economic Stimulus Package. And a rebirth for peace, due to an end to our conflict in the Middle East.  He feels that the transition may be painful, but like most rebirths, he sees a glorious beginning toward the end of the year.

Jonathan Hoenig of Capitalistpig Asset Management says that he learned from 2002 that he didn't want to own major indices this year - that time is long gone.  He does not feel that the Dow, Nasdaq and S&P are good places to put new money.  Jonathan says that the markets could go lower and that he would rather put his money in long-term bonds.

Jonas Max Ferris of Maxfunds.com says that the reason why it wasn't the time to buy the indices was because the stocks were too expensive.  He also points out that a lot of companies were fabricating their earnings, which also makes them undesirable.  Jonas says that hopefully the exposure of these fallacies will allow investors to build back up.

Gary Kaltbaum of Tradingmarkets.com thinks that the markets have had an 18-year party, and that now is the comeuppance from long years and overvaluation.  He says that he is not worried about the end of 2003, but is instead worried about January, citing that the market might not rally in the holiday season.  He does believe that there will be places to buy in 2003, as long as you know where to look.

Hilary Kramer of Montgomery Asset Management says that the market has gotten back to fair valuation, which makes it a time to buy into the major indices.  She also feels that tax cuts and the economic stimulus package will happen in January, bringing consumer confidence back.

Dagen McDowell of FOX Business News says that the arrests in 2002 will bring trials, indictments and people going to jail in 2003, which will bring faith back to the market.

New Years Re$olutions

Forget the old rules!  They didn't work in 2002, and chances are they won't work this year. If you want to get back to making money you need to make some new resolutions.

Re$olution No. 1: Don't hold on to Losers!

Hilary says that it's time to let go.  Sell your losers and clean house because it's time for a New Year.  She does recommend holding EMC Corp (EMC), Lucent Technologies (LU), JDS Uniphase (JDSU), and AOL Time Warner (AOL).

Jonas doesn't agree with the resolution, as he points out that this year's winners were last year's losers.  He and Dagen say that you shouldn't necessarily sell a stock just because it's down.  Dagen says that you should define how much of a loss you're willing to take.  Tom Dorsey of Dorsey, Wright and Associates says that investors should have a plan before investing, including what they will do if things go right and what they will do if things go wrong. Jonathan recommends not just looking at your portfolio and selling whatever is down, but mathematically figuring out if the numbers are working against you.

Re$olution No. 2: Don't buy a stock because "it can't possibly go lower."

Tom points out that stocks historically not only can go lower but can also go bankrupt.  Dagen and Hilary agree.  Hilary points out that you should "never try to catch a falling knife."  Jonas says that there is no such word on Wall Street as "can't" and that you shouldn't really focus on a stock’s price before buying, but rather the fundamentals and value of the company.  Jonathan thinks that a stock price really doesn't tell you much about a company.

Re$olution No. 3: Don't buy weakness, buy strength!

Jonathan says that a stock that is strong in the long-term has to start off strong in the short-term.  He points out that in order to look for strength, you should be looking for trends.  Hilary disagrees with Jonathan, pointing out that sometimes there can be a strong base to a company, but just some bad news.  You can sometimes buy on the dips. Jonas says that this thinking is equivalent to "buy low, sell high" which is nonsense. Dagen does not agree with the resolution, pointing out that in recent years, buying on strength/selling on weaknesses would have had investors buying internet stocks, which ultimately dropped, and selling stocks like Philip Morris (MO) which ultimately went up more than 100 percent. Tom says that investors should look for stocks with very strong uptrends.  When the stocks dip back to a support level, then Tom says buy.

Worst To First?

They were the Dow's biggest losers last year, but could they be big winners this year?

Home Depot (HD)
2002 Close: $23.96
Down 52.7 percent in 2002

Charles doesn't like Home Depot in early 2003, but feels that it is undervalued.  He says that if the company doesn't turn around in mid-year, there will be a coup by its founders.  Hilary doesn't like it, saying that Lowes (LOW) is too competitive, with better customer service.  Gary and Tom don't like it either.  Jonathan says that it is not on his list to buy and that he would try to trade out of it.

Intel (INTC)
2002 Close: $15.57
Down 50.32 percent in 2002

Tom says that Intel looks terrible.  Jonathan shies away as well, saying that Intel will be one of the stocks where people won't be able to believe how low it can go.  Charles says that it is too expensive and too “PC-centric.”  While he admits that there will be niche plays in the next year, he says that Intel won't be a part of it.  Gary points out that four million shares of the company have been sold off in the last two months by the insiders of the company.  He has no confidence in the company.  Hilary says that Intel was good at $10, but you should hold it if you own it.

McDonald's (MCD)
2002 Close: $16.09
Down 38.9 percent in 2002

Hilary loves the “golden arches,” saying that it is cheap at current prices.  She says that at least half of their sales are from overseas and that the weak dollar will help their bottom line in this respect.  Tom disagrees, saying that the stock is terrible and that it's going straight down.  Jonathan points out that McDonald's is the largest commercial landowner, but he's not buying it yet.

General Electric (GE)
2002 Close: $24.35
Down 37.7 percent in 2002

Jonathan has taken money out of GE and moved on to other areas.  He says that he does not see a reason to put new money in it. Charles says that while it is a little early for GE, he does believe that it can come back.  He just does not see any urgency for it just yet.  Tom recently bought some of this stock for its dividend.  While he may not suggest it for everyone, he does believe that if investors buy it now, they could see 30 percent returns in 10-20 years.  Gary cites recent reporting problems and says that he doesn't see the stock going anywhere.

Mutual Fund Face-Off

Which will make you more money in 2003, stocks or funds? Over the past 50 years, Stock Funds have been up 8.1 percent and the Dow has been up 7.5 percent.  But in 2002, Stock Funds have been down 20 percent, with the Dow down 16.8 percent.

Dagen says that mutual funds are still a cheap and easy way to gain access to expert money management.  She cites that in one purchase you get instant diversification.  Jonas points out that when the market goes down, these funds can go down too, but he says that there are a lot more negatives to picking your own stocks.

Gary's issue with funds is that they are fully invested and that they all look the same.  Tom agrees with Gary, saying that most of the mutual funds are invested in the same small cluster of stocks.  He doesn't see any reason to be invested in a mutual fund.

Extreme Stocks!

Extreme stocks, like extreme sports are risky, but a whole lot of fun when things go your way. Members of the panel came up with some extreme picks.

Hilary's Extreme Stock: Liberty Media (L)
2002 high: $15.03
2002 low: $6.16
2002 close: $8.94

Hilary says that this stock could double.  Liberty owns stakes in some of the most important media assets in the world and has a savvy management team.  Hilary believes that as the FCC eases regulations in the media, this stock could fly high.  Tom likes it.  Jonathan isn't a fan.

Tom' Extreme Stock: Qwest (Q)
2002 high: $15.19
2002 low: $1.07
2002 close: $5.04

Tom owns Qwest and likes it.  Even though the Telecom sector has been down Tom says that it has been on its way back up.  He thinks that it has a good chart and it could easily double in 2003.  Charles thinks it will be a survivor in 2003.  Hilary disagrees, saying that it's just too early.  Gary says the key is to just be sure, in all of these plays, to use good stops.

Charles' Extreme Stock: Rite Aid (RAD)
2002 high: $5.19
2002 low: $1.65
2002 close: $2.45

Charles says that a new management team could make Rite Aid a big percentage winner in the new year.  Jonathan wouldn't short it, but wouldn't buy it either.  Hilary and Tom like it. 

Gary's Extreme Stock: Corning (GLW)
2002 high: $11.15
2002 low: $1.10
2002 close: $3.29

Gary points to Tom's pick, agreeing that a lot of Telecom stocks are coming off of their lows.  He likes that insiders are averaging up in their purchases.  Hilary says stay away from Fiber Optics and stay away from Corning.  Tom says it's a good play off the bottom.

Jonathan's Extreme Stock: Royal KPN (KPN)
2002 high: $6.87
2002 low: $3.45
2002 close: $6.39

Jonathan says that he too is playing Telecom, but that the strongest ones are international.  Charles says to use $6 as a stop, because if it falls apart it will do so badly.  Tom says that it's a good company, but doesn't like that it doesn't pay a dividend.  Hilary likes Jonathan's international picks, but doesn't like Telecom in Eastern Europe right now.

Champagne Stocks!

It wouldn't be New Year's without champagne. These stocks ended 2002 at the very top of the Dow, Nasdaq 100 and S&P 500 charts.   Should you buy 'em in 2003?

No. 1 Dow Stock: Eastman Kodak (EK)
Up 25.5 percent in 2002

Tom says that while there isn't much upside to the stock, it does pay out a nice dividend.  He says he would buy the stock and write calls against it.  Dagen cites Kodak's bad performance due to digital photography and aggressive competition as reasons not to buy.  Jonas says that while you may want to own it now, do not own it for the long-term as it may not even be around in 35 years.  Hilary says the company has a bad business model.  Jonathan says he wouldn’t short it and would not buy it either.

No. 1 Nasdaq 100 Stock: Amazon.com (AMZN)
Up 74.5 percent in 2002

Jonathan says that it is a place to consider for new money.  Dagen feels that the stock is still too expensive.  Hilary says they have a lot of debt.  Jonas says that a bigger issue is that they may not have a strong enough margin on their sales to make it a good buy.  Tom likes it and says it will do well.

No. 1 S&P 500 Stock: Providian (PVN)
Up 82.8 percent in 2002

Jonas says that if the economy doesn't improve, this company will be bankrupt in the future, but if the economy is strong, this stock will be a great performer.  Dagen says not to own a company that is lending out money to companies that may not be able to pay them back.  Tom says the stock is a lottery ticket whose number was called last quarter.  Jonathan likes it.

Money Mail

Jonathan, Charles and Dagen capped off the show by answering some of your questions.

First, a question from Hulk Hogan.  He's been king of the wrestling world for over 20 years. He doesn't play the stock market a lot, but he would if our crew could answer his question.

Question: "I would love to ask an expert 'how could I invest a million dollars and get back ten million dollars in ten days?'  Give me that answer, brother, and I'm in."

Jonathan, a former card-carrying Hulk-a-maniac, says that over a long period of time, the best place to put a large chunk of money is in the bank.  Dagen agrees, saying that doing it as quickly as the Hulkster wants to could land you in jail.  Charles calls the Hulkster out, saying that just like Hogan didn't build his muscles in 10 days, you just can't make that kind of money in 10 days.

Question: "I'm thinking of taking a sip of Starbucks (SBUX).  What are your thoughts on the stock?"

Charles says that it it's a good stock, but if you're looking to outperform the market, this is not the place to be.   Dagen says that it's a bit expensive and that it could fall if there is even a hint of slowing sales.  Jonathan says that it's one of the stronger stocks in a weak sector, but not a buy.

Question: "Even with all that's going on in the world, isn't the U.S. stock market still the best place to be for long-term investing?"

Dagen says "absolutely."  Despite the recent scandals, Dagen points out that the U.S. economy is one of the strongest in the world with the best corporate regulation, meaning that we fix problems when the crop up.  Charles says that while you may want to buy a German car and an Italian suit, you should still buy U.S. stocks.  Jonathan says he likes American ideals, but he's not too keen on the stocks, preferring emerging markets instead.

Transcripts

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