Why This Bear Is Dancing

You could call Bernie Schaeffer a contrarian's contrarian. One of the few BusinessWeek Fearless Forecasters a year ago who predicted the bear market would continue through 2002, he nonetheless bristles at the label. "Contrarians are kind of ornery guys who want to fight the tape," says the 55-year-old founder of Cincinnati's Schaeffer's Investment Research Inc. But the technical analyst was taking his cues from weak price and volume data in the market. While the bulls ran wildly off track, Schaeffer went bearish and nearly nailed four indexes--the Dow Jones industrial average, the Standard & Poor's 500, the Nasdaq Composite, and the Russell 2000, an index of small companies.

On Dec. 6, when BusinessWeek called the winner, Schaeffer's picks were 4% off the Dow, 1.4% off the S&P, 5.5 % off the NASDAQ and the Russell. He had some tough competitors: Douglas Cliggott, formerly of J.P. Morgan Chase & Co. but now president of B&P Research Office Inc., missed the Dow by a scant 1.6%, and Joseph H. Barthel of Fahnestock & Co. came a hair-splitting 0.8% away from hitting the S&P. But Cliggott and Barthel overshot other indexes just enough so that Schaeffer's forecasts trumped in the overall tally.

The secret to Schaeffer's success has been exploiting disconnects between market fundamentals and investors' expectations. He predicted sell-offs in 2002 as hopes for a recovery were dashed. He's generally bearish, predicting the Dow will bottom at 6000 before rebounding to 8500 by next December. Ever the iconoclast, he's also predicting a sharp rebound in tech and says the NASDAQ will finish the year at 2200.

A tech rally aside, Schaeffer's favorite stock remains Krispy Kreme Doughnuts Inc. (KKD ), which he has liked since its 2000 initial public offering. Last year, it wasn't a great call, since it's down about 5% since the last survey and 16% year-to-date. Schaeffer thinks the company's consistent earnings growth justifies the high price for what many think is an overvalued stock. Eventually, he says, the short-sellers will "cry uncle, and that could lead to a buying stampede." Maybe then Schaeffer will sell.

By Brian Hindo

    Before it's here, it's on the Bloomberg Terminal.