NEW YORK (CNN/Money) - The first three weeks of 2004 are shaping up to look a lot like 2003.
All kinds of stocks turned in respectable gains last year (after three down years, the S&P 500 was up 26 percent), but the real winners were those left for dead when the tech bubble burst in 2000.
|MONEY Magazine exclusive
And now they're doing it again.
Lucent, down 70 percent from peak to trough in September 2002, rallied 190 percent in 2003. Through the first three weeks of 2004, it's up 44 percent.
|†Data through Jan. 23, 2004|
Other companies that came back from the grave include Avaya, Corning and PMC-Sierra (see table).
Meantime, the market's supposed leaders are all flat or down this year, including Microsoft, Exxon, Pfizer, Citigroup and Wal-Mart (the biggest company, General Electric, is faring a bit better, up 7 percent).
A rising stock price can be an indication of improving business fundamentals -- certainly, a lot of these big performers are no longer in danger of going out of business as was feared just a couple of years ago.
But how much longer can this go on?
Easy does it
A note of caution: 2004 won't be 2003, says Charles E. Kirk, who manages his own portfolio in Minneapolis and produces a web-based newsletter, The Kirk Report.
The Nasdaq 100 is trading at 38 times earnings estimates for the current year. Many of the hottest stocks have P/Es over 50, and some over 100.
"The lessons of the past are being ignored," Kirk says. "Right now it is all about being left behind and missing the train."
His parting words of advice for investors trying to hop aboard? "Have the exit doors clearly in focus."
A study by Mark Sellers, equity strategist at Morningstar, revealed that "the riskier the stock, the better its return last year." Out of 5,999 stocks in Sellers' database, 2,496 lost money last year. Average gain for that group's stocks: 117 percent, compared to 68 percent for those with earnings.
"People dive into the riskiest stocks when given the opportunity," Sellers concludes. "For the next few months, the momentum will continue." But it can't last, he says.
Donald Gher, a Coldstream Capital money manager in Seattle, thinks the jig is up for small caps in general. "The value isn't there this year, at least I don't see it," he says. "The only way to make money there this year is to get lucky."
Instead, Gher's eyeing the large caps that have lagged -- Microsoft, Wal-Mart, Pfizer.
Some are sticking with it
Some fund managers, of course, think they can still get gains out of these stocks.
Gunther Karger, portfolio manager and CEO of Miami-based Discovery Group, thinks there's still money to be made in what he calls the "rising garbage" stocks -- Lucent, for example, and ADC Telecom.
They may not double again, but he says he doesn't agree with pundits who recommend selling only because they're up so much.
"There are solid companies behind these stocks," he says. "The restructurings they went through are just now beginning to bear fruit. I'm not saying hang on to them forever, but if the companies continue to show improvement, why sell?"
Stephen Coleman, chief investment officer of Daedalus Group, St. Louis, shares that philosophy. He made out by buying Nortel last year at an average price of $1.01. He bought Lucent at $2.20. In many cases, he says he's hanging on.
"I look for the large caps that have fallen out of favor," Coleman says. "These stocks have assets, products, a real future. Nortel [now at $7] is a $20 stock. It might take five years, 10 years. Whatever it takes. I'll wait."