Pic ‘N’ Save: An Example of the Dicey Momentum Game
Wall Street’s current attitude toward small stocks was pretty much summed up by Will Rogers back in 1924:
“Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.”
These days, investors are still officially in love with stocks of smaller companies, an affair begun in January. But increasingly many frustrated money managers want to own only one kind of small stock--the ones that have already been bid up.
The surge in shares of Dominguez-based Pic ‘N’ Save Corp. recently is a case in point. Analysts say many of the buyers pouring into the stock probably aren’t even terribly aware of the firm’s business outlook, which remains iffy. All that matters is that the stock has turned hot, which automatically draws more buyers.
Otto Grote, a retail analyst with Derby Securities in New York, stopped following Pic ‘N’ Save closely last year. Now, he says, “I’ve been getting so many calls about it (from investors), I’ve got to get back up to speed on it. But I can’t believe people are really chasing it on the fundamentals.”
Of course, speculators have always filled an important niche in the stock market, and there are always some around to chase dicey stocks. The difference today is that so many investors are waiting breathlessly to follow the speculators into almost anything they begin to push up.
Even professional investors who for years extolled the virtues of buying small stocks based on their fundamentals (e.g., earnings) are becoming so-called momentum players: They’re unwilling to buy any small stock unless it’s already moving up rapidly. And they’re unwilling to stay with a stock that suddenly loses momentum, even if the fundamentals still look fine.
“One of the keys to success in the over-the-counter market today is going with the winners,” declares Jim Collins, publisher of OTC Insight newsletter in Moraga, Calif., and a 35-year veteran of the small-stock arena.
Momentum has become so important, Collins says, because the stock market overall has traded in a narrow range much of this year. Money managers are under heavy pressure from clients to beat not only the market’s performance but also each other’s. In a “sideways-moving” market that breeds frustration, Collins says, “the easiest way to make money is to go with the strong stocks.”
The trend encompasses big stocks as well, but it’s far more pronounced in the small-stock arena because they are by nature more thinly traded and thus rise much faster when money moves in.
Gauging a stock’s momentum is a relatively simple exercise: You compare the stock’s percentage move over a given period to the change in the broad market. If the stock is quickly outpacing the rest of the market, it becomes a candidate for momentum players.
Measuring “relative strength” has become much easier for individual investors since the birth of the newspaper Investor’s Daily in 1984. In its stock tables, Investor’s Daily shows each stock’s relative-strength rating, a number from 1 to 99. The higher the rating, the greater the stock’s gain in the previous 12 months versus the broad market.
Pic ‘N’ Save, for example, now boasts a relative-strength rating of 93, as the stock has rocketed from $13 to $19.75 in a matter of weeks. In contrast, electronics retailer Tandy Corp. has a relative-strength rating of just 23, a clear sign that the stock hasn’t been exciting many investors.
Obviously, relative strength doesn’t just come from nothing--it has to start somewhere. Often a stock begins to move on a good earnings report. In the case of Pic ‘N’ Save, a retailer of deeply discounted close-out merchandise, investors were roused by a big jump in August sales. The news seemed to cement the view that Pic ‘N’ Save’s new management team, installed late last year, was finally engineering a turnaround of the long-troubled retailer.
But retail analyst Barry Rothberg at Mabon, Nugent & Co. in New York cautions that Pic ‘N’ Save probably will earn just $1.05 a share this year, even if it has indeed turned itself around. New management has cut costs, retired 15% of the shares and halted a big expansion program. But Rothberg says it isn’t clear what the company does now to guarantee long-term growth. “I think the (stock) valuation is ahead of expectations,” he says.
Indeed, the problem with momentum stocks isn’t their initial moves. Rather, it’s the heights to which they often soar as money managers trip over each other to get into the shares.
What’s more, at the first sign that momentum has peaked, the investors who poured into the stocks can pour out just as quickly. Witness what has happened lately with stocks of health-maintenance organization companies. They rocketed off the charts in spring and summer, only to collapse in recent weeks--courtesy largely of the momentum players. For example, PacifiCare Health Systems of Cypress shot from $14.50 to $42.50 this year. Now it’s back to $28.25.
Cedd Moses, an L.A. money manager who invests $14 million for clients, is one small-stock player who sees warning signs in the momentum madness. Investors are desperately playing this game, he says, because “I think a lot of people missed the move early in the year, and they’re now trying to catch up.” Yet there are fewer hot stocks to latch on to, he says. So the handful that get anointed often go to the moon.
Moses has 85% of his clients’ assets in cash, waiting for a 10% to 15% market drop. That would be enough to spark broad new interest in small stocks, diluting the momentum game, he figures.
Does that mean all momentum stocks are destined to collapse? Certainly not. Some of these hot stocks are very exciting companies. What’s important is that investors who play the momentum game--or unwittingly get caught up in it--be aware of the risks, says OTC Insight’s Collins. You can’t afford to bet against these stocks when they’re red-hot. But neither can you afford to stay in them for very long if they start to crack, he says--at least, not if you’re in this for a fast buck, rather than for the long haul.
If a momentum stock suddenly begins to slip, and it doesn’t bounce back after eight to 10 trading days, Collins says, “You’ve got trouble.”
Rocket Stock? Shares of close-out retailer Pic ‘N Save Corp. have jumped sharply in recentweeks. but analysts question whether buyers truly like the company-or just the stock. There’s often a difference these days. Pic ‘N Save, weekly close: Tuesday close: $19.75
The Strong Get Stronger One way to gauge Wall Street’s fever for a particular stock is “relative strength”--how fast a stock is moving up compared to the rest of the market. The financial newspaper Investor’s Daily each day assigns a relative strength number between 1 and 99 to each stock, measuring the stock’s price change against the market overall during the previous 12 months. A relative strength number above 70 indicates a strong stock. Here are some current market favorites:
52-week Tues. ’91 Relative Stock high/low close gain strength 50%-Off Stores 34-3 1/2 32 5/8 +467% 99 Clothestime 8 7/8-1 3/8 8 3/4 +367% 97 Value Merch. 33-6 1/4 32 7/8 +199% 97 Gap Inc. 45 5/8-11 41 5/8 +151% 96 Surgical Care 36-9 1/8 32 3/4 +124% 96 Pic ‘N’ Save 20 1/4-5 3/4 19 3/4 +119% 93 Natl. Education 9 3/4-1 7/8 9 +106% 93 Quarterdeck 22 3/4-11 1/2 20 +100% 91 Cisco Systems 46 1/2-9 7/8 43 1/2 +94% 95 Neutrogena 24-10 22 1/4 +82% 85 S&P; 500 384.56 +16%
All stocks trade on NASDAQ except National Education and Gap (on NYSE).
Source: Investor’s Daily
