Let Losers Point You to Big Winners

• ByTim Melvin, RealMoney.com Contributor
• On 2:45 pm EDT, Wednesday May 13, 2009

I like to peruse the list of new lows periodically to see what is not working in the market under current conditions. I look at the 52-week-low list just like everybody else, but I also look for stocks that are hitting all-time lows. Once in a while I find a great stock idea there, such as Domino's Pizza which has nearly doubled since I wrote about finding it at all-time lows last year. But aside from stock ideas, scouring the new-lows list helps me find industries or types of companies that illuminate conditions in corporate America.

A lot of smaller community banks have made the list over the past few weeks. The big financials have enjoying quite a party in the past eight weeks, but the struggle has continued for their much-smaller brethren. While the big banks received federal assistance to help deal with the mess they created, the collapse of real estate is crushing the smaller banks, many of which will fail or be merged out of existence this year. I recognize a lot of the names on the list, and they are not bad banks; the combination of falling collateral values and rising unemployment is simply overwhelming them.

Conditions will probably not get better in time to bail out the little banks. The National Association of Realtors reported Tuesday that home prices fell in almost 90% of metropolitan areas in the first quarter from a year ago. The drop was more than 13%. The association also reported that national sales were down 3.2% year over year. With foreclosures showing no signs of slowing and a shadow inventory of as many as 700,000 homes still to come on the market, real estate has not bottomed yet.

The new-lows list also lays bare the perils of using leveraged ETFs to short stocks -- a bunch of these toxic trading vehicles sit on the list. As the market has risen, they have plunged quickly, exacerbated by the buying needed to close positions due to the leverage involved. This is the exact inverse of conditions in March, when all the leveraged long funds were on the list. I believe most people should just avoid the leveraged exchange-traded funds -- they are simply too volatile for most individual traders.

Also on the list were the usual suspects. These include a handful of one-trick-pony biotech companies that are running out of cash. Whatever they thought they were going to discover, it just did not work. Most of these came public during the boom years when it was easy to raise money; I am always amazed by investors' willingness to invest in these companies with no real product. Nonetheless, the next bull market will see investors caught up in hype and hope pour money into a bunch of new companies with the same poor profile, most of which will undoubtedly end up on a future new-lows list.

The other usual suspects are those companies that simply had too much debt to survive the economic downturn. They are mired in or facing bankruptcy. This group naturally includes the looming bankruptcy of General Motors that has forced the shares of the once iconic company to less than the cost of a draft beer at happy hour.

One security did catch my eye: Given the recent rally, I am not going to jump into the First Trust Value Line 100 ETF, but it moved way up on my watch list. When this fund was introduced, I was still a broker and the release generated a lot of excitement. The Value Line ranking system, focusing on a regularly rebalanced portfolio of its top-rated earnings and momentum indicators, has been shown to trounce market returns over time. In bull markets, it usually leaves the market as a whole far behind. The inverse is true, and the fund sells near all-time lows right now.

This fund contains all the stocks I would never buy on their own: Green Mountain Coffee and AutoZone are in there, and these are names I like on the short side. It holds Darden and Buffalo Wild Wings , two names in which I am actively looking for put spreads.

The FVL is a list of pure growth and momentum stocks. So why am I interested in it? Someday, growth stocks will have their day in the sun again, and the Value Line strategy will once again excel -- for a period of time. If I can buy a little of this during a market selloff, I can own the single best growth strategy at a very low price. Be warned, though -- this ETF is fairly illiquid, so entering and exiting positions can take a bit of finesse.

The list of stocks hitting all-time lows contains valuable information about the market and the economy. Occasionally, it turns up an idea worth investigating for a long-term reversion-to-the-mean trade.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider Domino's Pizza to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Buzz up!