SuperModels Community
Join the discussion in the MSN Money SuperModels Community.
Purchase
Jon's new book.
SuperModels
Recent articles:
• Reality catches up with satellite-radio hype, 5/21/2003
• The muddy waters of Digital River, 5/14/2003
• 15 gritty survivors worth a gamble, 5/7/2003
More...
| | SuperModels
3 picks from a prosperous Amex
Stocks on the exchange few people talk about are posting impressive gains and beating all the major indexes. Here's how you can take advantage of the trend.
By Jon D. Markman
The Amex is the Annika Sorenstam of Wall Street -- an overlooked powerhouse in a smaller league that has broken into the big time in a powerful, splashy but somewhat mysterious way.
You havent seen any headlines about the American Stock Exchange on any finance magazines, but theres no denying that the companies that list there, in aggregate, have consistently outpaced their rivals on the New York Stock Exchange and Nasdaq Stock Market in the past one-, three-, five- and seven-year periods. Take a look at this table, which compares the Amex composite ($XAX.X) to the Nasdaq composite ($COMPX), Dow Jones industrials ($INDU), S&P 500 ($INX) and Russell 2000 ($RUT.X):
| Index performance | | | Amex | Nasdaq | S&P 500 | Dow | Russell 2000 | | Jan 2003 to May 2003 | 10% | 9% | 3% | 0% | 6% | | Jan 2002 to May 2003 | 9% | -24% | -18% | -15% | -15% | | Jan 2001 to May 2003 | 4% | -34% | -28% | -19% | -10% | | Jan 2000 to May 2003 | 5% | -64% | -37% | -24% | -16% | | Jan 1997 to May 2003 | 56% | 17% | 26% | 33% | 15% |
|
Since most of the companies that list on the American Stock Exchange are small- and medium-sized companies, one might guess that the success of its composite is a small-cap phenomenon. (Only 12 Amex stocks weigh in at more than $1 billion in market capitalization). Yet the Amex has handily beaten the small-cap Russell 2000 index in every period.
And since it did well in periods of softness for high-flying growth stocks, one might guess that its success can be laid to a concentration of value stocks. Yet, again, its clear that the Amex is beating the high-flying Nasdaq even in this year of sharp rebound for tech stocks.
So where is its persistent strength coming from, and how can we take advantage of it?
Big changes
First, a quick primer. The American Stock Exchange has changed quite a bit in the past 10 years, but perceptions die hard. A decade ago, it was considered a dead-end alternative listing venue for companies that couldnt meet New York Stock Exchange or Nasdaq requirements -- a backwater for companies with sometimes shady reputations. In the late 1990s, new management cleaned house and decided to turn it into a niche exchange serving small and mid-cap companies that sought more handholding than the NYSE could provide and less volatile trading than the Nasdaq could provide.
Bob Rendine, an exchange spokesman, says the specialist auction market seeks to provide a tranquil, less volatile, more economical place to trade. A smaller company may prefer all orders coming into a single trading post where a specialist provides an orderly market, in contrast to the electronic market-maker system at the Nasdaq that's geared for high-volume tech stocks whose prices gyrate like weeds in a windstorm.
The National Association of Securities Dealers, which runs the Nasdaq, bought the Amex in 1999, but as the market soured the organization decided in 2001 to dump it. Amex Chairman Salvatore Sodano has said publicly that the sale is on track, but has privately told regulators that the exchange has suffered significant erosion in its market share and financial impairment, according to published reports. Industry analysts believe the Amex has seriously slipped in its core business of options market-making and has lost ground in trading a product it pioneered -- exchange-traded funds -- to Island and other electronic communications networks.
Be that as it may, theres no sense in disregarding the investor popularity of the stocks that remain. Rendine attributes their consistent performance in part to diversification: Despite its reputation for harboring mostly small biotechnology and energy stocks, no sector of the economy accounts for more than 12% of the approximately 780 Amex listings, he says.
Power sources
One source of power: Out of the 200 stocks listed on the Amex with a price of at least $1 and market cap of at least $70 million, 39 are closed-end debt funds, 12 are closed-end equity funds and three are closed-end foreign funds. Shares of closed-end funds act like stocks.
The strength in high-yield and convertible securities, therefore, helps account for about a quarter of the strength in the exchanges largest listings right off the bat. The five best performers in 2003 are shown in the following table. The Aberdeen Australia Equity Fund (IAF, news, msgs), run by a British asset manager, is particularly interesting as it has handily outperformed most of its peers by investing in one of the few countries to support the United States militarily in Iraq. It's still selling at a 13% discount to its net asset value.
| High-yield and convertible securities | | Symbol | Company | 5/23 price | Net assets* | % chg YTD | | PHF | Pacholder High Yield | $8.48 | $108,026,714 | 37.7 | | FAX | Aberdeen Asia-Pacific | $5.71 | $1,511,431,300 | 23.3 | | IAF | Aberdeen Australia Equity | $6.86 | $117,360,882 | 16.1 | | DMF | Dreyfus Municipal Income | $9.95 | $202,810,846 | 11.9 | | BCV | Bancroft Convertible | $19.42 | $90,982,700 | 9.8 |
|
* In millions
Another source of strength: Out of the 200 largest stocks on the exchange, about 7% are low-priced, small biotechnology, drug delivery or medical instrument companies -- a generally red-hot group over the past year that has accelerated in the past few months. Here are the top names in this group:
| Low-priced, small biotechnology, drug delivery or medical instrument companies | | Symbol | Company | 5/23 price | Market cap* | % chg YTD | | ALT | Alteon | $5.01 | $179,889,068 | 144.4 | | IVD | IVAX Diagnostics | $3.92 | $107,933,282 | 130.6 | | COB | Columbia Laboratories | $7.00 | $248,178,000 | 108.3 | | VSV | Vasogen | $4.06 | $210,856,097 | 88.0 | | AVN | Avanir Pharmaceuticals | $1.66 | $97,012,058 | 66.0 | | IVX | IVAX Corp. | $17.00 | $3,314,252,000 | 40.1 |
|
* In millions
A third source of strength has been small oil and gas exploration and refining companies. They prospered before the war with Iraq in anticipation of higher energy prices, then dipped, but have surged anew in recent weeks as energy prices have risen along with expectations for renewed vigor in the world economy.
| Small oil and gas exploration and refining companies | | Symbol | Company name | 5/23 price | Market cap* | % chg YTD | | CRB | Carbon Energy | $14.39 | $88,498,502 | 43.9 | | PDC | Pioneer Drilling | $4.55 | $74,469,853 | 39.1 | | HOC | Holly Corp. | $28.67 | $444,929,731 | 31.2 | | MWE | MarkWest Energy Partners | $29.76 | $71,870,401 | 27.8 | | NBR | Nabors Industries | $43.97 | $6,403,966,858 | 24.7 |
|
* In millions
A fourth source of strength is the 39 listed companies in the savings and loan, regional bank, real estate investment trust, mortgage investment or property management business -- about 19% of the top 200 companies. This is still largely a play on home refinancing and the spread between the low rates at which banks can borrow today and the much higher rates of their average loans.
| Banking and loan companies | | Symbol | Company | 5/23 price | Market cap* | % chg YTD | | DFC | Delta Financial | $4.77 | $77,211,000 | 333.6 | | PAB | PAB Bankshares | $12.59 | $118,723,701 | 55.4 | | IMH | IMPAC Mortgage Holdings | $15.26 | $750,746,231 | 32.7 | | MXM | MAXXAM | $12.11 | $79,054,078 | 30.2 | | CTO | Consolidated-Tomoka Land | $24.27 | $136,300,323 | 26.1 | | IRW | IBT Bancorp | $46.5 | $138,477,000 | 22.5 |
|
* In millions
As a measure of the low regard with which the Amex is treated around the market, there are no exchange-traded funds or mutual funds specifically aimed at replicating its performance. To take advantage of its vitality, perhaps the best we can do is pick a couple of individual Amex stocks that encapsulate a couple of the powerful themes at work in the market today.
Some stock choices
One modest choice might be Ivax (IVX, news, msgs), which develops and markets generic drugs worldwide out of its home base in Miami. The stock traded into the 40s a couple of years ago and has recently emerged from a base in the $9 to $11 range on high volume.
In late April, the company reported a first-quarter profit of $29 million on sales of $317 million, up from $19.3 million and $272 million in the year-ago period. Investors fled from Ivax in the past couple of years because it hasnt produced any sensational drugs to take up the slack for competition for its generic formulation of the cancer drug Taxol. But Chief Executive Phillip Frost has given the company a powerful vote of confidence by buying 469,500 shares worth $3.4 million in six chunks over the past six months at prices ranging from $12.34 to $15.79. In fact, his largest purchase was at the highest price just a couple of weeks ago. The valuation is somewhat high, but not outrageous, at a forward price-to-earnings ratio of 24 on estimated earnings growth of 18% to 25%.
Two more possible choices: Regal-Beloit (RBC, news, msgs), which makes electric motors and motion-control products for many markets. The stock was down 30% in the past year but has recently rebounded. Its valuation is relatively low, short interest is relatively high, insider activity is positive, it pays a 2.6% dividend yield and heavy industry is generally on the upgrade in the market. Gorman-Rupp (GRC, news, msgs) is a similar idea. It designs and manufactures pumps for use in a wide variety of industrial applications, including construction, energy production and air conditioning. The stock is down 22% in the past year but up 10% in the past month; valuation is decent, the insider picture is fine and it pays a 3% dividend yield.
If these ideas seem boring, well, thats in the spirit of the exchange. Dull but steady as she goes, a bit like Sorenstam.
Fine Print
One Amex stock thats done great in the past few weeks is Paxson Communications (PAX, news, msgs), which I featured in my May 7 column, 15 gritty survivors worth a gamble. Its up 62% since then as analysts have keyed on its low valuation and talk has focused on possible federal broadcast ownership rule changes, which could make it an attractive takeover target. . . . My column last week on the enticing prospects for Sirius Satellite Radio (SIRI, news, msgs) elicited dozens of e-mails from readers in support of the service, which I will share next week. . . . One indication of how badly beaten down Sirius shares had become: when Merrill Lynch issued a report on Thursday upgrading the stock to neutral, the price advanced 15%.
Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at supermodels@jonmark.com. At the time of publication, his fund was not long or short any stocks mentioned in this column, but positions can change at any time.
|
