Beaten-Down Bargains Will Rebound

This core principle of investing can make you a lot of money, and, perhaps more importantly, it can save you a lot of money: The market always overshoots.

The obvious example on the upside occurred in the late '90s, when the market recognized the transformative power of the World Wide Web. Tech stocks deserved to be marked up, but an enthusiasm-crazed market overshot by a country mile, taking the Nasdaq to over 5000.

Given the seriousness of the credit crisis last year, the market was right in taking stock prices lower. When a full-blown liquidity panic was added to the mix, though, the resulting carnage was nothing short of breathtaking, particularly among smaller, less liquid stocks. Smaller stocks that should have been discounted by 20% or 30% were blasted to smithereens, crushed by 80% and 90%.

Embedded therein is the strategy that has outperformed all others since I first articulated it one year ago, in a series of columns for RealMoney.com. It's the strategy behind the remarkable performance of my Top 10 list for 2009, which is now up 104% vs. an S&P return of 24%. The strategy: Fill your portfolio with stocks that were unfairly crushed during the mega-bear market.

Here's why it works. Historically, the average stock recovers 50% to 100% of its decline within two years after a bear market. A sixth grader can do the math. You'll get a whopper of a return owning a stock that was crushed from $20 to $2 in the bear market if it retraces just one-half of its decline. And you'll get a wimpy return owning stocks that barely got nicked during the mega-bear, even if they retrace 100% of their decline.

In this and upcoming columns (posted every Monday), I'm updating the 27 stock picks that I made late last year as they reach their one-year anniversary. Each one of those recommendations was a smashed stock, unreasonably discounted during the bear market. And many of the picks, including those discussed below, continue to be compelling buying opportunities.

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At time of publication, Alsin and/or ACM was long IDT, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, a California-based investment adviser. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.