As we move deeper into the summer, the market continues to confound and confuse. The mini flash-crash activity caused by Knight Capital (KCG) on Wednesday has hammered another nail into the coffin of investor confidence. European Central Bank (ECB) President Mario Draghi is constantly trying to talk up the eurozone and drawing up plans for outright bond purchases to prop up failing financial regimes on the continent. The Fed decided not to throw the market a QE3 bone at this month's meeting. Earnings season can be described with a single phrase, "light on revenues." Yet the stock market continues to hang in there and is less than 3% off the highs of the past year.
Coming into June, it looked like the market might finally take a turn for the worse. It fell to about 10% below the highs, the level where I start to pay attention to the broader market in my bargain searching. It stayed at that level for about as long as it takes to have a cup of coffee and then it climbed right back up to near the highs. Led by double-digit percentage increases in many of the beaten-down oil names and some quickly recovering long shots such as Sprint (S), the market has once again down what was the least expected by most investors. While I enjoy seeing some of my holdings, including Hess (HES), Sprint and Tesoro (TSO) on the top of the monthly performance lists, I am far more interested in what is happening on the other end of the scale.
I find it useful to look at the top losers in the S&P 500 when the market is rising sharply, which it did from the first of June to the end of July. I often find some stocks that have plunged too far, too fast, and now trade at a compelling valuation. On other occasions, the list of the fallen can provide valuable economic information and point out which areas of the market should be avoided.
Two of the 10 biggest losers in the past month are for-profit education stocks. DeVry (DV) has fallen by 38% in the past month and is now down 67% in the past 52 weeks. Industry leader Apollo Group (APOL) fell an additional 26% and is now off 50% in the past year. Although the industry got new regulations that were less restrictive than many expected, the investigations shined a light into the dark corners of the sector. The very high loan default rates and low graduation rates were exposed and the industry has suffered mightily as a result. If you shorted the group, or just avoided them after I first suggested selling these stocks, you have paid for your Real Money subscription for a decade or so. It is not going to get any better any time soon. The business model is broken for these companies and I still believe these stocks will all fall to single digits before for-profit higher education develops a new model.
I am somewhat intrigued by the presence of Lexmark (LXK) on the list of top losers. The printer company gets more than a third of its revenue from Europe and weakness in the eurozone has hit profits and the stock price pretty hard. The market for laser printers is intensely competitive and I don't think things will get better anytime soon for the one-time growth stock darling. Demand is still lagging as both consumers and businesses are delaying purchases again. Lexmark is worth keeping an eye on but the stock will not be a buy until it falls closer to the $10 mark. Unfortunately, I do think we will get there.
The one coal stock on the list, Alpha Natural Resources (ANR), continues to see its stock price fall as a result of declining coal demand. This stock is not going to pass the margin of safety tests for long-term investors, as it is now down 83% over the past year, it is probably worth looking for a trading opportunity in the shares. As my fellow contributor Glenn Williams recently pointed out here on Real Money, the increase in natural gas should provide some support for coal demand. Aggressive investors might want to look at a Jan. 13 combo trade to benefit from a recovery in coal sentiment and the stock price.
Periodically reviewing the big winners and losers in the market provides not just potential trading and investment opportunities but valuable insight into the economy and overall market.