It's been a while since I highlighted a bearish stock picking screen. But I'm getting more calls and emails inquiring about just that. So I thought now would be a good time to revisit this one.
Typically, I'll only follow a bearish strategy once the market officially enters into bear territory, which is defined as the market being -20%.
However, there's nothing wrong with using a bearish strategy to put toxic stocks on your radar screen to alert you to get out (if you happen to own one of them) or to consider shorting if you don't.
Check out the screen below. Lots of good ideas for picking stocks that should be making their way lower. And also provide a chance to profit while they do.
Parameters and Methodology
The main theme of this screen is to find overvalued companies.
Granted, even undervalued companies were getting hammered then (not to mention downright great companies too), but usually the best opportunities for short-selling are the ones that are overvalued on valuations, underperforming on growth and are receiving downward earnings estimate revisions.
- Price greater than or equal to 5
(I generally prefer to short stocks at higher prices, but I also know that cheap stocks (price-wise, not value-wise) can get clobbered as well. So the line is drawn at $5. But $7, $10, $15 stocks are on the table, as well as $50 and $70 and $100 stocks too.)
- Average 20 Day Volume greater than or equal to 100,000
(The volume minimum makes sure that there's at least a fair amount of trade activity each day. Bear markets (whether it be the overall market or individual stocks) can be prone to sharp 'bear market' rallies. So I want to make sure there's enough trade activity to be fairly treated if I want to get out fast.)
- Projected Growth Rate F(1)/F(0) less than Median for its X Industry
(This puts companies in the bottom half of their Industry on an underperforming radar screen. Few things can sack a company more than a poor growth outlook.)
- P/E using F(1) Estimate greater than 50
(Statistical analysis shows that companies with P/Es of 50 and above have a higher probability of underperforming. So we're searching for companies with P/Es over 50 to give our shorts the highest probability of success.)
- Debt/Equity Ratio greater than 2 x the Median for its Industry
(The Debt to Equity ratio shows how much of a company's assets are financed thru debt. The bigger the number, the more debt financing it has. In 2008, with credit tightening, debt was becoming harder to come by. Simply put, companies relying too much on debt are more vulnerable. And quite frankly, bull market or bear market, any company that relies too much on debt is more vulnerable. For this screen we're looking at companies with a Debt to Equity ratio that is twice that of its Industry.)
- % Change in F(1) Earnings Estimates (last 12 weeks) less than 0
(Stocks receiving negative revisions are prone to receive even more negative revisions. And statistics have shown that companies receiving downward earnings estimate revisions are more likely to go down in price as well.)
- % Change in F(2) Earnings Estimates (last 12 weeks) less than 0
(We're putting the odds in our favor again by requiring the negative outlook by analysts to extend out more than just the current year. By seeing F(2) get downgraded as well, this seems to show a greater conviction on their reduced outlook.)
- Zacks Rank greater than or equal to 3
(There are Zacks #3 Ranks (Holds) in here, along with Zacks #4 Ranks (Sells) and Zacks #5 Ranks (Strong Sells). But I wouldn't expect a company with the above criteria to stay in a 3 spot for long. In the meantime, the Zacks Rank 4s and 5s zero in on the worst ones.)
- Zacks Rank Top # 7
(In fact, this item specifically has the Zacks Rank zeroing in on the worst ones by narrowing the list down to the 7 stocks that meet all of the above criteria with the worst Zacks Rank.)
If you're interested in more stocks that just these 7, you can expand the screen by removing this item. Currently, with this item removed, it's producing 22 toxic stocks.
If you're wondering why 'Top' #7 and not Bot (Bottom) #7 is being used if we're looking for the worst Zacks Ranks, it's because the operators 'Top' and 'Bottom' are not qualitative operators. Top and Bottom simply selects the highest or lowest value (i.e., numbers) regardless of the qualitative characteristics. In this case, the higher number is the worse number when it comes to the Zacks Rank.
All of these things combined make for a less than ideal picture for a stock, which of course makes it perfect for a potential short sale screen.
So how did it do?
In 2008, this strategy, using a 4-week rebalancing period, produced an average compounded return of over 120% while the market plummeted nearly -40%.
In fact, even if you didn't start trading this strategy until the official beginning of the bear market, which began in July of 2008 (a bear market isnt officially called until it goes down by -20% or more), the strategy still produced an average annual return of over 70%.
And it's not too late to consider this one now.
Here are 5 stocks from this week's screen, (10/23/12):
(AMZN - Analyst Report) - Amazon.com Inc.
(CCOI - Snapshot Report) - Cogent Communications Group Inc.
CNQR - Concur Technologies, Inc.
(VSAT - Analyst Report) - ViaSat Inc.
(RRC - Analyst Report) - Range Resources Corp.
Short strategies work best in bear markets. My experience has been that even the best short selling strategies will have a rougher go in a bull market.
I pointed out the official start to the bear market because that would have been the most appropriate time to start using a bear strategy. When to stop using a bearish strategy? Once an official uptrend is called -- which came in Q2 of 2009.
If an official bear market is called (and that could literally be only a day or so away), you might want to give this strategy a serious look to make money as the market goes down. This strategy comes loaded with the Research Wizard. And you can try this and the Research Wizard for free.
Click here to learn more about it.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks portfolios and strategies are available at: https://www.zacks.com/performance.