NEW YORK (CNN/Money) - It ain't always the cream that rises to the top.
Yes, everybody is brimming with how swell the market has done this year. Best quarterly performance on the S&P 500 since 1998, first time the market has shown a gain at the year's midpoint since 1999, yadda, yadda, yadda.
But the quality of the stocks that have been leading the charge leaves an awful lot to be desired. The top two stocks in the S&P this year: Dynegy, ringing in with a 256 percent gain and Williams Companies, with 196 percent. If memory serves correctly, weren't both these companies in a similar line of business as a joint called Enron?
Next down the list are Avaya, with a 164 percent gain, Corning, at 123 percent, and PMC-Sierra, with 112 percent. All five of the S&P's top returners in 2003 have lost money over the past year.
So what are we to make of the way the stocks of less-than-sterling companies have run up? There are two ways of looking at it.
The bulls say that these particular issues trade less like stocks than options on the survival of the underlying company. Not too long ago investors were seriously questioning if any of these outfits would be in the land of the living much longer. They were all priced -- with reason -- like companies that were just a step or two ahead of their creditors.
With the economy's improvement and, just as importantly, the loosening up of the credit markets, their prospects for survival look much better today than they did at the beginning of the year.
The bears, on the other hand, say the bulls' argument is a bunch of malarkey, and that the reason these stocks are running higher has nothing to do with rationality and everything to do with speculation. Investors, it seems, haven't learned a thing from the bear market. They're still out to make a quick buck, and to do it they'll jump into the most questionable stocks.
Both camps probably are a little right. One cannot deny, after all, that things look better now than they did at the beginning of the year. War in Iraq is behind us rather than in front of us, the tax cut has been passed, the Fed is pumping money into the economy and credit is easier to come by.
But the gains in these stocks seem a bit overdone. Think of Corning. Isn't its business -- telecom equipment -- still rife with excesses? Aren't there still far too many players chasing far too little business? What, really, has changed for the sector since the beginning of the year?
If the market is going to improve through the rest of year, it is probably necessary for these speculative issues to take a rest, and for the market to shift its focus onto bigger, better-run companies with more stable businesses. That would be a sign that investors are buying because they see a real economic rebound coming, not because they think certain companies have reduced their chances of going bankrupt.