Like so many people around the planet, I tuned into some Olympic action over the weekend. Ever since childhood, I have enjoyed watching events that do not usually grace the American sports airwaves and learning about other nations and cultures. For some reason, this time I've been paying attention to the "also-rans." You know, that person out in lane eight that's usually not in the camera, except at the start. What strikes me about it all is that while everyone shakes hands, pats backs and exhibits good sportsmanship, the Olympics, in a competitive sense, is one of the cruelest events on Earth. You either have what it takes or you don't. And winners aren't decided by tippy-toeing around the issueeven in the case of the gymnastics floor exercise. The reality is that you have to be the stone-cold best to win.
Besides the unusual and (as my English friend coined it) "very British" opening ceremony, the big news of the first few days of competition were the failings of a well-known swimmer and a major disappointing performance by a gymnast. It just goes to show you that those who were once considered the best eventually have bad days that could mark the end of their careers. Thinking about the let downs of a few well-known athletes and a Zacks.com customers question about stocks to sell gave me an idea. What are the big-name companies that have already peaked or are primed for a fall?
Be Careful with Big Name Stocks
Almost every stock that grows into a large market value began life with a small market value (or at least that's the way it used to be before the mega IPOs). As the corporation brought desired products or services to the marketplace, it became more and more profitable. As profits grew, investors began to notice and purchased the stock. After many years of this cycle of success, the company eventually matured into a big player in the corporate world and its market cap increased as well.
However, as both the Olympics and the stock market illustrate, if you're near the top, sometimes there's no other place to go but down. If the company stagnates and fails to innovate, or becomes susceptible to competition, a mature company will begin to decline. Because some well-known stocks will peak, it's a good idea to identify them before they begin to slip.
Avoid the Downside
Using the Zacks Research Wizard, I researched ways to recognize big-name companies before they underperformed. Since the Research Wizard contains hundreds of pieces of data for each company all at my finger-tips, it took me just a short while to discover a strategy that identified well-known companies that are "sell" or "short" candidates. Below are the results from a 10-year backtest that compares a strategy of those "biggies destined to collapse" alongside the S&P 500.
Here's one way to find "sell" candidates or stocks to short:
- First, the stock has to be a member of the S&P 500. (We want only the largest market cap companies.)
- Of the S&P 500 companies, select only those 50 with the largest market value. (We want to focus on the biggest of the big.)
- Add another filter by selecting only those stocks with a Zacks Rank greater than or equal to 3. (Any Zacks Rank of 3 or greater is expected to either be at or under market performance.)
- Next, pick the 20 stocks with the lowest Sales/Assets Ratio. (Remember we are looking for poor performance and one of the best indicators of this is a low Sales/Assets Ratio.)
- Finally, choose the 10 stocks with the highest Price-to-Sales Ratio. (A high Price/Sales is usually a sign the stock is overpriced and ready for a decline to bring the valuation back in line.)
Here are five of the ten stocks that passed the screen this week (8/03/12). Remember these are SELL candidates:
QCOM QUALCOMM Incorporated
QUALCOMM designs, develops, manufactures, and markets digital telecommunications products and services. This large cap stock has a Zacks Rank of 3, which isn't bad but not great either. Its Sales/Assets is 0.4, which is another fairly mediocre number. But what alarms me the most about this company is the P/S of 5.54. That means for every $1 of actual sales, you need to pay $5.54 for the pleasure of owning this company. Think this company is due for a major correction? I do too.
OXY Occidental Petroleum Corporation
Occidental Petroleum engages in the exploration and production of oil and gas properties in the United States and internationally. This company has experienced numerous downward revisions in earnings expectations for the next 3-4 quarters. That's never a good sign, and is the reason behind its awful Zacks Rank of a 5. If sales indeed soften up, the stock price of this company will surely follow suit.
KO The Coca-Cola Company
The Coca-Cola Company engages in the manufacture, marketing and sales of nonalcoholic, sparking and still beverages worldwide. This well-known company has seen its stock price approximately double over the last three years with little change to corporate fundamentals or profitability. When you see a strong, increasing price chart and a flat earnings trend, a little red flag should pop up. Also, this company has a poor Zacks Rank because of decreasing earnings prospects. It's P/S of 3.8 means that if a can of Coke costs $1, an investor could purchase the ownership of that $1 revenue for $3.80. That doesn't sound very refreshing.
AMGN Amgen Inc.
Amgen discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology for grievous illnesses, primarily in the United States, Europe and Canada. This stock, as well as the entire biotech industry, is up over 27% YTD. That kind of run usually brings into question a stock's valuation. And the questions are surfacing regarding Amgen, which has a P/S ratio almost two times the S&P 500's average. Its Sales/Assets ratio isn't that great either by bringing in only 33 cents of revenue for every dollar in assets.
GOOG Google Inc.
Google maintains an index of web sites and other online content for users, advertisers, and Google network members and other content providers. The current stock price of this mega-company is about the same as it was in December 2007 even though a lot of zigzagging has occurred over that time. What's noteworthy is that Google still looks expensive by almost all valuation measures. Its P/S ratio is more than double the S&P 500 and over 1.5 times its industry average. The company has also seen earnings projections revised downward.
Your Ticket to Gold (or at least profitable investing)
Remember back in 1984 when a certain fast-food restaurant chain had a scratch card game that gave away free food depending if an American athlete won a medal for a specific event? Remember also that the Soviet-bloc countries boycotted those same Olympics as payback for the boycott of 1980? That combination resulted in a windfall of almost as much free food as you could eat. Using the Research Wizard to find outperforming strategies is almost as easy as getting a free lunch. Although you can't use it to win a gold medal at the Olympics; you can use the Research Wizard to profit in the stock market. That's the closest competitive arena for most of us anyway.
Want to know the other five stocks the screen identified as large cap stocks to avoid? Or how about discovering stocks that are ideal short candidates with a strategy that's already available in the Zacks Research Wizard?
Starting today, you are invited to use it free of charge. You'll have 14 days to create, tweak and backtest your strategies. At the same time, you can see the latest picks from pre-loaded winning strategies with average gains of up to +67.4% per year.
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Kip Robbins is a Quantitative Analyst with Zacks.com. He analyzes screens and strategies for Zacks customers and for use in Zacks Research Wizard, which empowers individual investors to use market-beating screens, build their own, and backtest their results.