VectorVest Views 6/3/05
Last year, June 18, 2004 to be exact, I wrote an essay called "BW's Cold Growth Stocks." It was based upon Business Week's annual feature of "Hot Growth Stocks," i.e., their perception of the "The Best 100 Small Companies in America." So how did I come to call them cold growth stocks?
As explained in last year's essay, I ran a high momentum backtest on BW's 2004 hot stock selections which were sorted by GRT*RT and compared it to a bottom fishing backtest in which the same universe of stocks was sorted by GRT/RT. (This strategy was illustrated as the Strategy of the Week on June 18, 2004.) Surprisingly, the bottom fishing strategy performed better than the high momentum strategy. I was somewhat surprised by this result since I normally associate momentum trading with high growth stocks.
When this year's issue of BW's Hot Growth Stocks arrived, I decided to re-visit the subject. Sure enough, the bottom fishing strategy bested the high-momentum strategy by a long shot, gaining 47.86% since June 4, 2004. I'd like to think these good results were due to the strategy I used, but Quick Test showed that the average gain for the 91 stocks, which were in the WatchList for the whole year, was 48.81%. Actually, this was a super list of stocks. Many of them, such as Urban Outfitters, Hansen Natural, and Chicos Fas, often appeared on our lists of top stocks ranked by VST-Vector. One would think you could throw darts at this list of stocks and make a bundle. But that wasn't so. I encountered the same phenomenon as I did last year, i.e., it was difficult to find a strategy that could outperform the bottom fishing strategy cited above. Why is that?
It seems to me that with the exception of the long rally made from August 12th to December 31, 2004, we have been in a trader's market for the last 18 months. Investors have been buying the dips and taking quick profits. Consequently, stocks that have gone up get hammered and stocks that have gone down get purchased. In other words, bottom fishing strategies have been more in tune with the market. So it even makes sense to go Bottom Fishing Using Hot Growth Stocks.