Breakout

Trash or Treasure? Ejection From the NDX Is a Buy Says Detrick

Breakout

With only 100 members and admission costs that run into the tens of millions of dollars, the United States Senate has been called one of the most exclusive clubs in the country. Rare is the occasion when a member in good health chooses to leaves on their own — unless something spectacular is waiting for them on the outside.

Interestingly, there's another club I know of that also admits 100 members and is prohibitively off-limits, save for a handful of elite businesses. Unlike the Senate, this group is based in Times Square, New York, and is called the Nasdaq 100 (^NDX), although it is often referred to simply as "NDX." To get in means a certain level of riches and success. To be ousted is nothing short of shame.

And yet, in the spirit of self-redemption, new research shows expulsion from the NDX is not the end of the world. In fact, it's often just the opposite.

"Back since 1995, if a stock gets kicked out of the Nasdaq 100, the next year it's up 22%," says Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. What's even more confounding, he says, is that the average gain for stocks added to the index is only 11%.

"There's something to that," he explains, segueing right into one of his favorite themes. "You want to buy when there are low expectations. Think about it. If a stock gets kicked out of a major index or ETF because of performance, that tells you that expectations are rather low."

With this is mind, Detrick began to tinker with the formula to determine if there was a better time to buy these soon-to-be outcasts.

"We then looked at if [a stock] did well the last quarter before it got kicked out," he says. Wouldn't you know it, those rejects ended up doing ''extremely well."

Recent examples of this fallen-down factor, he says, include Netflix (NFLX), Green Mountain Coffee Roasters (GMCR) and Research in Motion (RIMM), all of which were in a basket of 10 companies given the boot from the NDX on Christmas Eve.

In the case of RIMM, Detrick says it's a well-known but "hated" stock that saw its short interest go up 100% and didn't have a single Buy recommendation from any of 32 analysts who covered it. It's a formula, he says, that can lead to a stock going much, much higher on even the slightest bit of good news.

Infosys (INFY) is another NDX refugee Detrick likes, citing the stock's 18% pop last week after better-than-expected earnings results.

The same cannot be said for Apple (AAPL) — at least not yet. While the largest stock in the index is facing no risk of being kicked out, its recent 28% decline has caught the eye of many investors. Not Detrick, however, who says "it's still one that has further to go on the downside" and believes there will still be a better opportunity to buy it.

"I'm not saying to put your whole portfolio in names like these," he says, pointing to the beauty of low expectations. "But from a trading point of view, some of these names are areas you definitely should consider."

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