As “low quality” occurs again, this utility could explode

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It was a crazy time. Stocks for the dead were skyrocketing. Short sellers were getting spoiled. And everyone was wondering if too much “liquidity” inflated bubbles.

It was 2003.

The GameStop saga, as a market event, seemed to end last week.

GameStop‘s

shares (ticker: GME) fell 80% to $ 63.77, and while it was still more than three times higher than it had at the end of 2020, its captivating capacity had severely diminished.

Yes, politicians continue to call for urban investigations and regulations. Reddit marketers continue to gather around the harassed video game retailer. And there is talk of “manipulated markets” and the “democratization of trade” and the “revolt” of the little one that continues to ring through the electronic corridors of Wall Street and beyond. Even bearish equity strategists have delved into the game, calling the start of GameStop the sign of a market bubble that is sure to pop up any day.

If only it didn’t sound so familiar. The following shows how the Trader column described the situation in May 2003, when the com-point was finally completed: strong markets. The riskiest sectors outperform the market in general. Small-cap stocks have risen ahead of larger stocks in recent weeks … Low-priced stocks, many of which came this way for very good reasons, have already jumped for months. ” pasted it into almost any Trader column in recent weeks.

The comparisons don’t stop there. Recent headlines that highlighted the losses of Melvin Capital and other short selling hedge funds also echo those of 2003. Only one of the 17 short funds ended a positive return that year, with Rocker Partners, a short fund. outstanding, which finished the year 36%. David Rocker, from the background, said he let it feel like “Alice in the Mad Hatter’s Ball.” This quote could come from any short seller now.

What the shorts forget is that when the recession is over, shitty companies, especially those that seem to have no future, come together. In 2003, the list included Lucent, the former Bell Labs; Yahoo! i

Research In Motion,

known today as

BlackBerry

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

AMC Entertainment Holdings

(AMC) and, well, BlackBerry. Actually, this makes sense: when the U.S. falls into a recession, weaker companies apply for bank protection, while the rest are bought for a while. “We are on stage [in the business cycle] when lower quality companies are expected to do better, ”says Barry Knapp, managing partner of Ironsides Macro Economics.

In the twelve months following the October 2002 decline, the S&P 500 quality and minimum quintile index rose 38%, doubling the

S&P 500

19% increase. Low-quality stocks also outperformed as they emerged from the recession in 2009, with an index that gained 69% to 47% of the S&P 500 during the twelve months that began in March of the same year. (According to S&P, high-quality companies have high equity returns and less financial leverage, among other factors. Low-quality ones do not.)

We haven’t seen that kind of performance since the end of March 2020 (low quality has gained 40%, with a 44% increase in the S&P 500 increase), but it could simply be at the beginning of the process. The bear market, after all, lasted only 19 days. The low quality rally, if it appears, should have legs. It certainly did so after bearish market funds in 2002 and 2009, when oversupply of these stocks continued for the second year. This could mean that there are still opportunities in some areas of the low quality stock market.

However, once the rebounds are over, it is difficult for long-term games to be achieved. Some companies disappear, others dominate their industries and even struggle to exist, as their actions went nowhere for a decade or more.

This was the case with utility

AES

(AES). It was very successful, as were many utility companies, after the collapse of Enron, and was exchanged for a dollar in October 2002. A small pressure reached up to $ 8.35 in June. (a staggering 781% rise) and then reached $ 25.52 in June. 2007. Since then, it has never closed more than the 2007 highs.

Bye now. AES, which has a large renewable energy business, finally came out of that range when Democrats gained control of the Senate in January. This, combined with a subsequent setback, prompted Evercore ISI technical analyst Rich Ross to call it a “long-held conviction” that offered a “14-year base overflow.”

But it’s not just the techniques that make AES, now trading at $ 26.86, look attractive. Its profits were a success from the Covid blockade, but not as great as expected. And it should get a boost from President Joe Biden’s climate plans and push to reduce emissions. The company has also finally overcome all its problems of almost 20 years ago by obtaining an S&P investment rating in November.

After more than a decade in the desert, AES may be ready to return to work.

Read the rest of The Trader:The stock market returns for the right reasons, but the yield curve could mean problems

Write to Ben Levisohn to [email protected]