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To create the screen below we began by looking for illiquid stocks with troubling accounting signs. While there are many ways to go about this, we chose to look for names with a falling current ratio and troubling inventory trends.

The ratio is found by dividing the total current assets by total current liabilities. The higher the current ratio, the more liquid the company, and more capable it is to cover its short-term obligations. Naturally, a rapidly falling current ratio is troubling.

We screened for stocks with current ratios that have consistently dropped over three 12-month intervals and fallen close to a ratio of 3. A ratio of three is not necessarily concerning in itself, but the quick drop is. (For example, Harbinger Group is listed below with a current ratio that fell from 58.47 to 2.27 between 2009-12-31 and 2012-09-30.) Ratios below 1.5 are where the trouble really begins, so investors should be wary of the signs.

We moved to looking at growth in quarterly revenue slower than growth in quarterly inventory year-over-year. We also looked for companies with quarterly inventory increasing as a percent of current assets.

When revenue is growing slower than inventory, it may indicate that the company is having trouble selling its inventory - although this might just indicate inventory building or a change in sales policies.

Investor Sentiment

It's always helpful to gauge what the rest of the market thinks. One source for that is the number of shares shorted. Companies seeing significant increases in shares shorted are being viewed more negatively, and vice-versa.

Here we looked for stocks seeing the most significant increase (in this case, +2% of share float) in shares shorted month-over-month. This indicates that short sellers are bearish about the future performance of these stocks.

The List

Our final list consisted of 4 stocks.

Interactive Chart: Press Play to compare changes in 1-year return over the last two years for stocks mentioned below.

The stocks listed below are signaling multiple bearish trends, but do you think these names will drop like short sellers expect? Use this list as a starting point for your own analysis.

1. American Railcar Industries, Inc. (NASDAQ:ARII): Designs, manufactures, and markets hopper and tank railcars in North America.

  • Market cap at $876.2M, most recent closing price at $40.78.
  • Shares shorted have increased from 528.61K to 723.55K over the last month, an increase which represents about 2.07% of the company's float of 9.41M shares. Days to cover ratio at 3.14 days.
  • Current Ratios decreased from 10.96 to 7.89 during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, Current Ratios decreased from 7.89 to 5.03 (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the final time interval, Current Ratios decreased from 5.03 to 3.7 (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).
  • Revenue grew by 5.51% during the most recent quarter ($207.68M vs. $196.84M y/y). Inventory grew by 14.87% during the same time period ($110.08M vs. $95.83M y/y). Inventory, as a percentage of current assets, increased from 21.08% to 29.33% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).

2. Cerus Corporation (NASDAQ:CERS): Engages in the development and commercialization of the INTERCEPT Blood System.

  • Market cap at $280.97M, most recent closing price at $4.35.
  • Shares shorted have increased from 5.74M to 6.55M over the last month, an increase which represents about 1.38% of the company's float of 58.89M shares. CERS short float stands at 10.53%, which is equivalent to 15.79 days of average trading volume. As an example, this is much higher than Biogen Idec Inc. (short float at 1.13%, representing 1.8 days of trading volume) and Celgene Corporation (short float at 1.54%, representing 1.72 days of trading volume).
  • Current Ratios decreased from 2.51 to 2.12 during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, Current Ratios decreased from 2.12 to 1.88 (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the final time interval, Current Ratios decreased from 1.88 to 1.72 (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).
  • Revenue grew by 1.06% during the most recent quarter ($10.53M vs. $10.42M y/y). Inventory grew by 58.07% during the same time period ($10.18M vs. $6.44M y/y). Inventory, as a percentage of current assets, increased from 16.21% to 23.14% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).

3. Harbinger Group Inc. (NYSE:HRG): Operates as the holding company that focuses on acquiring interests in companies that operate in diverse range of industries.

  • Market cap at $1.18B, most recent closing price at $8.27.
  • Shares shorted have increased from 1.27M to 2.25M over the last month, an increase which represents about 3.01% of the company's float of 32.58M shares. Days to cover ratio at 6.56 days.
  • Hedge funds are also cautious: Net institutional sales in the current quarter at -2.6M shares, which represents about 7.98% of the company's float of 32.58M shares.
  • Current Ratios decreased from 58.47 to 11.03 during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, Current Ratios decreased from 11.03 to 2.48 (12 months ending 2011-09-30 vs. 12 months ending 2010-12-31). And for the final time interval, Current Ratios decreased from 2.48 to 2.27 (12 months ending 2012-09-30 vs. 12 months ending 2011-09-30).
  • Revenue grew by 4.83% during the most recent quarter ($1,222.3M vs. $1,166M y/y). Inventory grew by 40.83% during the same time period ($679.2M vs. $482.29M y/y). Inventory, as a percentage of current assets, increased from 29.61% to 47.59% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2012-01-01).

4. Intermec, Inc. (NYSE:IN): Designs, develops, integrates, sells, and services wired and wireless automated identification and data collection products and provides related services worldwide.

  • Market cap at $596.04M, most recent closing price at $8.27.
  • Shares shorted have increased from 4.72M to 5.78M over the last month, an increase which represents about 1.77% of the company's float of 59.95M shares. Days to cover ratio at 5.78 days.
  • Current Ratios decreased from 3.17 to 3.16 during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, Current Ratios decreased from 3.16 to 2.16 (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the final time interval, Current Ratios decreased from 2.16 to 1.81 (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).
  • Revenue grew by -8.51% during the most recent quarter ($216.64M vs. $236.78M y/y). Inventory grew by 6.32% during the same time period ($110.17M vs. $103.62M y/y). Inventory, as a percentage of current assets, increased from 23.16% to 31.84% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).

Short data sourced from Yahoo Finance, all other data sourced from Finviz.

Source: Traders Are Cautious Of These Illiquid Stocks With Troubling Inventory Trends