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Deep Dive

Philip van Doorn

June 8, 2020, 4:20 p.m. EDT

Investors’ overreaction creates short-term opportunities in stocks

Low prices from mid-March presented investors with bargains

By Philip van Doorn, MarketWatch


Apache Corp.
An Apache oil rig in the Granite Wash Basin, in Texas. The company's shares rose 284% from March 31 through June 5.

The remarkable recovery of U.S. stocks illustrates how markets tend to overshoot major events. This can set up opportunities for large gains over short periods. It also underlines the need to be careful with statistics.

Here’s a chart showing the movement of the S&P 500 Index (S&P:SPX)  this year through June 5:


FactSet

Through Friday, the benchmark index was down only 1% for 2020, despite the coronavirus outbreak, the unprecedented shutdown of major portions of the U.S. economy, and all the fear that led the index to be down 31% for 2020 through March 23.

The well-known hedge fund manager Stanley Druckenmiller said during a CNBC interview Monday that he was “humbled” by the stock market’s recovery, and had missed out on most of it. He said he had underestimated the effect of the Federal Reserve’s efforts to enhance liquidity and the power of investors’ enthusiasm for the reopening of the economy.

Now here’s a chart of continuous contract prices for West Texas crude oil this year through June 5:


FactSet

WTI is still down 35% this year, but you can see the continuous contract price went from $61.06 at the end of 2018, to as low as $6.50 (intraday) on April 21, to $39.55 Friday.

Mark Grant, the chief global strategist for fixed income at B. Riley FBR, wrote repeatedly in his “Out of the Box” email commentary that this year’s oil doldrums were a “blip” and that the low prices signaled opportunities for long-term investors.

On Monday, Grant wrote: “I continue to think that there are opportunities left in this space as many people and institutions have not fully warmed up to what is underway yet. “

Confusing percentages

The following table includes the 25 stocks among the S&P 500 that were down at least 60% in the first quarter. They are sorted by those declines, and you can see that all have shot up in the second quarter:

Company Ticker Price change - first quarter, 2020 Price change - second quarter through June 5 Price change - 2020 Price change - 2019
Apache Corp. (NAS:APA)   -84% 284% -37% -3%
Norwegian Cruise Line Holdings Ltd. (NYS:NCLH)   -81% 105% -62% 38%
Royal Caribbean Cruises Ltd. (NYS:RCL)   -76% 116% -48% 37%
Marathon Oil Corp. (NYS:MRO)   -76% 122% -46% -5%
Noble Energy Inc. (NAS:NBL)   -76% 86% -55% 32%
Carnival Corp. (NYS:CCL)   -74% 63% -52% 3%
Devon Energy Corp. (NYS:DVN)   -73% 111% -44% 15%
Halliburton Co. (NYS:HAL)   -72% 112% -41% -8%
Occidental Petroleum Corp. (NYS:OXY)   -72% 80% -50% -33%
Diamondback Energy Inc. (NAS:FANG)   -72% 99% -44% 0%
Kohl's Corp. (NYS:KSS)   -71% 82% -48% -23%
Oneok Inc. (NYS:OKE)   -71% 108% -40% 40%
Alliance Data Systems Corp. (NYS:ADS)   -70% 79% -46% -25%
TechnipFMC PLC (NYS:FTI)   -69% 42% -55% 9%
ViacomCBS Inc. Class B (NAS:VIAC)   -67% 77% -41% -4%
Schlumberger NV (NYS:SLB)   -66% 63% -45% 11%
DXC Technology Co. (NYS:DXC)   -65% 38% -52% -29%
MGM Resorts International (NYS:MGM)   -65% 84% -35% 37%
PVH Corp. (NYS:PVH)   -64% 67% -40% 13%
United Airlines Holdings Inc. (NAS:UAL)   -64% 34% -52% 5%
Simon Property Group Inc. (NYS:SPG)   -63% 62% -41% -11%
Nordstrom Inc. (NYS:JWN)   -63% 47% -45% -12%
Marathon Petroleum Corp. (NYS:MPC)   -61% 76% -31% 2%
National Oilwell Varco Inc. (NYS:NOV)   -61% 53% -40% -3%
Gap Inc. (NYS:GPS)   -60% 75% -30% -31%
Source: FactSet

If you had decided to, and been able to, invest $1,000 a apiece in those 25 stocks at the close March 31, your value would have risen to $46,669 at the close June 5.

The stock market tends to overreact to major events. Nearly half the names on the list are energy companies, which suffered the double-whammy of the economic shutdown and the increase in oil production by OPEC+ countries while demand collapsed. That problem has been solved, for now.

In late March, the average investor would probably have told you to get your head examined if you said you were buying energy stocks. In hindsight, it didn’t take very long for oil prices to begin recovering.

The same can be said of the entire stock market. The crash from the record high Feb. 19 was easy to understand, with the shocking spread of COVID-19 and the quick shutdown of so much business. It was easy to lose all hope. But here we are, with hope (and Fed money) driving an equally astonishing market recovery.

So what is the confusing part? It’s that a high percentage increase in a short period doesn’t mean a stock really has “recovered.” Consider Apache Corp. (NAS:APA) : The stock is up 284% during the second quarter, but it’s still down 37% for 2020.

Read: This unusual income fund has a dividend yield of 6.5% and has beaten the S&P 500

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