Why "Leading Stocks" Aren't Leading

While there have been some incredible gainers among the stocks we follow on our companion blog for the most part this leadership has been narrow and thin. We can’t find 20 stocks that pass our fundamental metrics, usually the starting point of our evaluation process. This isn’t what you would expect of a market that has seen the major indices rally 55 – 60% off its bottom. What can account for this marked underperformance of “leading stocks” when we expect just the opposite during market uptrends?

A look at weekly charts of the NASDAQ Composite and S&P 500 is illuminating. In spite of the incredible gains the NASDAQ would have to climb another 41% from here to match its old highs; the S&P 52%. Once put into perspective it is evident that they have only begun to mitigate the damage done during the bear market.

Compounding this is the time element. While the 2000 – 2002 bear market on the NASDAQ was far worse than the 2007 – 2008 bear for either exchange, the turn of the century bear played out over 31 months. This gave the business cycle time to rejuvenate. Within a few months of hitting bottom there were scores of publicly traded companies hitting our growth radar screens with the supercharged growth we look for beginning to become apparent.

That’s not happening this time around. The reason is likely the span of only 16 ½ months for the recent bear. While that amount of time can be on the long side for typical 20 – 30% bear markets it clearly pales by comparison to the turn of the century bear with which it has more in common, given the depth of its correction and impact on the economy that it reflects.

This amount of time is insufficient for companies to emerge with the kind of earnings acceleration we look for to drive true growth stocks. Thus we are left with stocks like AAPL in our portfolio, a solid performer having doubled off the March bottom but sporting flimsy growth stock fundamentals of the sort we would ordinarily pass over.

Time heals all wounds and certainly in time there will be a fresh crop of outperforming growth names. But that might well be for another market cycle after the current uptrend has run its course. For now we broaden our parameters as we look to expand our universe of outperforming stocks.