Since ‘low quality’ is a return, this utility may break out

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It was a crazy time. Stocks that remained rose. Short sellers pack beats. And everyone was wondering if too many “liquidity” bubbles were inflating.

It was 2003.

The GameStop saga, as a market event, seems to be coming to an end this past week.

GameStopsay

equities (ticker: GME) fell 80%, to $ 63.77, and although still more than three times higher than at the end of 2020, the ability to buoy declined sharply.

Yes, politicians are still asking for investigations and planning regulations. Reddit merchants continue to put together the beleaguered video game merchant. And there is talk of ‘spoiled markets’ and the ‘democratization of trade’ and the ‘revolt’ of the boy by the electronic halls of Wall Street and beyond. Even clumsy stock strategists got the game and called GameStop’s a sign of a market bubble that will surely appear every day.

Even if it does not sound so familiar. Here’s how the Trader column described the situation in May 2003, when the dot-com bust finally came to an end: ‘There are emerging hints of the kind of speculative stimulus and latent selling pressure that could undermine strong markets. Risky sectors outperform the broader market. Small-cap stocks have been roaring ahead of larger stocks over the past few weeks. Shares with low prices, many of which have become so for very good reasons, have been jumping for months now. ‘We could have pasted it into just about any Trader column in recent weeks.

The comparisons do not stop there. Recent headlines highlighting the losses at Melvin Capital and other short-selling hedge funds also resonate in 2003. Only one of the 17 short-term funds made a positive return that year, with Rocker Partners, a prominent short-term fund, closing the year with 36% has. According to David Rocker of the fund, he feels like ‘Alice by the Mad Hatter’s Ball’. This quote can now come from any short seller.

What the shorts forget is that when a recession ends, crazy companies, especially those that seem to have no future, converge. In 2003, the list included Lucent, the former Bell Labs; Yahoo !; and

Research in motion,

known today as

BlackBerry

(BB). Today, these are names like GameStop,

AMC Entertainment Holdings

(AMC), and indeed, BlackBerry. This actually makes sense: when the US falls into a recession, the weakest companies ask for bankruptcy protection, while the rest buy for a while. ‘We are at the stage [in the business cycle] when you expect lower quality businesses to perform better, ”says Barry Knapp, managing partner of Ironsides Macro Economics.

In the twelve months from the end of October 2002, the S&P 500 quality-lowest quintile index rose by 38%,

S&P 500’s

19% increase. Low-quality stocks also outperformed the 2009 recession, with their index 69% higher than the 47% S&P 500 rise over the 12 months that began in March of that year. (High-quality businesses have a high return on equity and less financial leverage, according to S&P. Low-quality ones do not.)

We have not seen such an achievement since the bottom of March 2020 – low quality has reached 40%, causing the S&P 500 to decline by 44%, but it could simply be early in the process. After all, the bear market lasted only 19 days. The low quality rally, if it does show up, should have legs. This certainly took place after the bottom market bottoms in 2002 and 2009, when performance in those stocks continued for a second year. This could mean that there are still opportunities in some parts of the stock market’s low market.

Once the bounce is complete, it can be difficult to obtain long-term games. Some companies disappear, others continue to dominate their trades, and even more fight just to exist, with their shares for a decade or longer.

This was the case with utility

AES

(AES). It hit hard, as did many utilities, following the collapse of Enron, and traded in October 2002 for a pittance. A short pressure rose to $ 8.35 by June – a staggering 781% increase – and then to $ 25.52 in June 2007. Since then, it has never closed higher than in 2007.

Until now. AES, which has a large renewable energy business, finally broke out of the series when the Democrats gained control of the Senate in January. That, coupled with a subsequent setback, led Evercore ISI technical analyst Rich Ross to call it a ‘long-held conviction’ and offer a 14-year base breakthrough.

But it’s not just the techniques that make AES, which now trades at $ 26.86, look attractive. His win was hit hard by the Covid shutdown, but not as big a hit as expected. And it should get a boost from President Joe Biden’s climate plans and the pressure to reduce emissions. The company has – finally – also passed all its problems of almost 20 years ago by earning an investment rating from S&P in November.

After more than a decade in the desert, AES may be ready to run again.

Read the rest of The Trader:The stock market bounces for the right reasons – but the yield curve can cause problems

Write to Ben Levisohn by [email protected]