Buying 2011 Losers Triples S&P 500’s Return: Technical Analysis

Buying the stocks that lost the most in 2011 has provided the best returns so far this year, according to Bespoke Investment Group LLC.

The 50 stocks in the Standard & Poor’s 500 Index with the biggest declines in 2011, including First Solar Inc. (FSLR) and Netflix Inc. (NFLX), rose an average 11.2 percent this year through yesterday, almost triple the 4 percent increase in the benchmark gauge, according to data compiled by Bespoke and Bloomberg.

The strategy yielded the best return among eight categories tracked by the Harrison, New York-based firm, boding well for fund managers whose performance suffered last year amid record- high volatility and correlation, according to Justin Walters, Bespoke’s co-founder.

“Last year’s losers have been this year’s winners,” Walters wrote in a note late yesterday. “If you underperformed in 2011, chances are you’re off to a great start to the year.”

The S&P 500’s gain through yesterday was the best start to a year since it rose 10 percent over the first 11 trading days in 1987, according to data compiled by Bloomberg. Stocks are overcoming earnings that trailed estimates by the widest margin in three years as improvements in hiring, manufacturing and car sales extend the S&P 500’s 11 percent rally in the October- December period, its best fourth-quarter gain since 2003.

Best Gains

Four out of this year’s five best gains were 2011’s biggest losers, according to Bloomberg data through yesterday. First Solar, which tumbled 74 percent in 2011, rebounded 27 percent this year through yesterday. Netflix, down 61 percent last year, is up 42 percent. Bank of America Corp. and Sears Holdings Corp. (SHLD), the fourth and fifth worst-performing stocks in 2011, surged 22 percent and 24 percent, respectively.

Equity mutual funds focused on large companies had their worst year since 1997, with only 17 percent beating the S&P 500 in 2011, based on data from Chicago-based Morningstar Inc. Managers were whipsawed by surging price swings and almost lockstep stock moves in the second half of year amid concern over surging government debt levels in Europe and the U.S.

Buying the 50 stocks in the S&P 500 with the lowest price- to-earnings ratios generated the second-best return, gaining 9.4 percent this year, according to Bespoke. The worst strategy was purchasing stocks with the highest dividend yields. Such a strategy returned only 0.5 percent, the data show.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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