How have the biggest losing stocks of 2013 fared so far

The punch line: The accepted wisdom, really theory, is that big losers of one year become big winners the next year. Buy the losers in December. This theory is invalid -- or at least should be modified as far as it pertains to all stocks. The theory may have validity for the huge companies of the Dow, where companies do tend to come back and companies rarely fail. With most other stocks, however, total failure is a genuine possibility. Big losers of one year can become even bigger losers the next year because they have systemic troubles. In general, stay away from companies with systemic troubles. They can dissolve into nothingness. If a preliminary pass to avoid such stocks is made, returns improve.

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Method: I took a random list of big stocks that were losers in 2013, "Fortune 500: Worst-performing stocks of 2013," http://money.cnn.com/gallery/investing/2013/12/19/fortune-500-worst-stocks/, and calculated how they have performed YTD in 2014. I just read off the returns from Yahoo! Finance. Thus things like bad data, dividends (potentially), and reorganizations are not considered.

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Results: A portfolio of the fifteen worst stocks of 2013 has returned -10% so far this year, underperforming the +10% return of the index. However, it gets more interesting when the group is broken down into two constituents: (a) companies with long-term troubles; and (b) the rest. The stocks in group (a), indicated by a comment in the last column below, have returned -37%. When you have that many coal stocks and one bankruptcy (or close to it, NIHD lost 97% and now trades on the pink sheets as NIHDQ -- I've used -100% in the table) that is bound to happen. The gold miner may not be in long-term trouble but gold has done poorly over the long term. The stocks in group (b) have returned a more respectable +13%, ahead of the market by 3 percentage points. Here is the breakdown:

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Conclusion: You have to be careful buying losers, as far as it pertains to most stocks. The best bet is to avoid those with systemic troubles. You need to do a preliminary pass and weed out such stocks. If this is done, buying the remaining losers (as a group) can work though you have to be careful and pretty patient.