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
Average 20 Day Volume greater than or equal to
(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
(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
(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
(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
(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
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
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
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 isn't officially called until it goes down by -20%
or more), the strategy still produced an average annual return of
And it's not too late to consider this one now.
Here are 5 stocks from this week's screen, (10/23/12):
- Amazon.com Inc.
- Cogent Communications Group Inc.
- Concur Technologies, Inc.
- ViaSat Inc.
- 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:
AMAZON.COM INC (AMZN): Free Stock Analysis
COGENT COMM GRP (CCOI): Free Stock Analysis
CONCUR TECH INC (CNQR): Free Stock Analysis
RANGE RESOURCES (RRC): Free Stock Analysis
VIASAT INC (VSAT): Free Stock Analysis Report
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