Buy What the S&P Trashes

In the past year, the best way to play the three flagship stock indexes of Standard & Poor's was not to buy and hold them, as most finance professors and many advisers recommend. You were better off being the ultimate contrarian, purchasing stocks that impatient S&P index managers expelled from their lists for reasons other than mergers or corporate restructuring, and holding them for one to 11 months.

The difference between the returns of expelled versus added stocks in S&P's widely watched large-cap, mid-cap and small-cap indices from January through the first week of December was a stunning 45 percentage points, with expelled stocks gaining 42.3% and added stocks losing 2.4%.

These results did not accrue from just a couple of big outliers. Of the 48 stocks kicked out of the indexes this year for what S&P euphemistically calls "lack of representation" -- you and I would call it "we got sick of this stock because it's gone down so much" -- 28 subsequently went up from the date of expulsion through Dec. 7, and 20 fell. And you typically didn't have to wait long to capture the effect: Most gainers experienced the bulk of their move in one to two months. ...