Four Hot Trends From the Hottest Exchange
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 haven't seen any headlines about the American Stock Exchange on any finance magazines, but there's 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 below, which compares the Amex composite with the Nasdaq Composite,
Dow Jones Industrials
,
S&P 500
and Russell 2000.
Because 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 because it did well in periods of softness for highflying growth stocks, one might guess that its success can be laid to a concentration of value stocks. Yet, again, it's clear that the Amex is beating the highflying 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 couldn't 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, there's 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 exchange's largest listings right off the bat. The five best performers in 2003 are shown in the following table. The
Aberdeen Australia Equity Fund
(IAF) - Get Report
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.
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:
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.
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.
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)), 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 hasn't 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) - Get Report
, 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) - Get Report
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, that's in the spirit of the exchange. Dull but steady as she goes, a bit like Sorenstam.