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Bearish stock strategists are calling the GameStop saga a sign of a market bubble.
Marangifoto / Dreamstime
It was a crazy time. Left-wing stocks for death were rising. The short sellers were taking a beating. And everyone wondered if the excess of “liquidity” was inflating the bubbles.
It was 2003.
The GameStop saga, as a market event, seemed to have come to an end last week.
GameStopin
shares (ticker: GME) fell 80% to $ 63.77, and although it was still more than three times higher than at the end of 2020, its ability to captivate had seriously decreased.
Yes, politicians are still calling for planning investigations and regulations. Reddit merchants continue to gather around the besieged video game retailer. And conversations about “manipulated markets” and the “democratization of commerce” and the “revolt” of the little one continue to echo through the electronic corridors of Wall Street and beyond. Even pessimistic stock strategists got into the game, calling GameStop’s tear a sign of a market bubble that is sure to burst any day.
If only it didn’t sound so familiar. See how the Trader column described the situation in May 2003, when the dot-com bust finally came to an end: “There is emerging evidence of the kind of speculative resentment and latent selling pressure that can undermine strong markets. Risky sectors are overtaking the broader market. Small-cap stocks have outpaced large-cap stocks in recent weeks … Low-priced stocks, many of which have stayed that way for good reasons, have been jumping for months. ”We could have pasted that on almost any Trader column in the past few weeks.
The comparisons don’t stop there. Recent headlines highlighting losses at Melvin Capital and other short selling hedge funds also echo those of 2003. Only one of the 17 funds sold ended with a positive return that year, with Rocker Partners, a prominent short fund, ending the year down 36%. David Rocker from the bottom said it left him with a feeling of “Alice at the Mad Hatter’s Ball”. That quote can come from any short seller now.
What sellers forget is that when a recession ends, bad companies, especially those that look like they have no future, recover. In 2003, the list included Lucent, ex-Bell Labs; Yahoo! and
Search on the go,
known today as
Blackberry
(BB). Today, they are names like GameStop,
AMC Entertainment Holdings
(AMC) and, well, BlackBerry. In fact, it makes sense: when the United States goes into recession, the weakest companies ask for bankruptcy protection, while the rest gain some time. “We are on the stage [in the business cycle] when you expect lower quality companies to perform better, ”says Barry Knapp, managing partner at Ironsides Macro Economics.
In the 12 months since the bottom of October 2002, the S&P 500 Quality – Lowest Quintile index increased by 38%, doubling the
S&P 500’s
19% increase. Poor quality stocks also outperformed the recession in 2009, with their index gaining 69%, compared to the 47% gain of the S&P 500 in the 12 months beginning in March of that year. (High-quality companies have a high return on equity and less financial leverage, among other factors, according to S&P. Low-quality companies do not.)
We haven’t seen that kind of performance since the low point of March 2020 – low quality has gained 40%, lagging behind the 44% increase in the S&P 500 – but it may simply be at the beginning of the process. After all, the bear market lasted only 19 days. The low quality rally, if it appears, must have legs. It certainly did so after falling market funds in 2002 and 2009, when the superior performance in these stocks continued for the second year. This may mean that opportunities still exist in some low-quality areas of the stock market.
Still, once the jumps are over, long-term games can be difficult to achieve. Some companies disappear, others start to dominate their sectors and even more just struggle to exist, with their actions going nowhere for a decade or more.
That was the case with the utility
AES
(AES). It was hit hard, as were many utility companies, after the collapse of Enron, and traded for less than a dollar in October 2002. A slight squeeze brought it to $ 8.35 in June – a surprising increase of 781 % – and then at $ 25.52 in June 2007. Since then, it has never closed above the 2007 highs.
So far. AES, which has a large renewable energy business, finally got out of that range when Democrats won control of the Senate in January. This, combined with a subsequent setback, has led Evercore ISI technical analyst Rich Ross to call it “long high conviction”, offering an “impressive 14-year base breakup”.
But it is not just the technical aspects that make AES, which now trades at $ 26.86, look attractive. Its profits were hurt by the Covid blockade, but not as big as expected. And it should receive a boost from President Joe Biden’s climate plans and efforts to reduce emissions. The company also – finally – overcame all of its problems almost 20 years ago, earning an investment grade rating from S&P in November.
After more than a decade in the desert, AES may be ready to function again.
Read the rest of The Trader:The stock market is recovering for the right reasons – but the yield curve could spell trouble
Write to Ben Levisohn at [email protected]