Investing in the worst performing stocks

Introduction: Momentum vs. Mean Reversion
Future Performance of the Biggest Recent Losers
Can the Kailash Rankings Help Differentiate Between Future Winners and Losers?
Conclusion
Appendix: November’s Biggest Losers with December Rank Data

Introduction: Momentum vs. Mean Reversion

Recently, a long-time client asked us about the wisdom of buying stocks that have been beaten down in hopes for a rebound if investors have overreacted and unfairly punished these stocks too much. This was of particular interest to the client as it was his perception that market volatility has recently increased and the market seems to be punishing stocks more for disappointments. This interesting question raises important investment topics including momentum and mean reversion.

Given the interest in the topic, we felt that this was worthwhile to research and write this short and hopefully helpful note. It might seem intuitive that shopping among the market’s biggest losers is a good idea if only because there is a finite boundary to downside momentum. This note attempts to evaluate the wisdom of shopping among the stocks with the worst recent performance. Overall, we found that investors would be best served avoiding or even shorting the biggest losers over the previous 1-6 months. We also found that the Kailash Capital (“Kailash”) Rankings Tool was very helpful in differentiating between the stocks among the biggest recent losers that would rebound and those that would continue to underperform further.

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As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade. If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you. KCR also offers a wide range of easy-to-use but sophisticated tools. Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
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ADDITIONAL READING

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

Click the following to read more about Are Energy Stocks Undervalued, Mean Reversion Trading Strategy

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

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