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Investing in fallen angels (stocks that have been out of favor for a long time) is always a high-risk proposition. That's why it is appropriate for aggressive investors. But where should investors look for fallen angels?

In the Wisdom of Value Investing: How To Profit On Fallen Angels, Gabriel Wisdom suggests that investors look at three forces that create fallen angels: business cycles, one-time calamities, and market crash-panic. I will end one more: Technology shifts.

Business cycles that usually last anywhere from three to five years create fallen angels among the cyclical sectors of the economy like automobiles, capital equipment, commodities, and energy and materials, as the economy goes into a contraction that rises as the economy recovers. The table below gives a sample of companies that may be considered as fallen angels in the current slow growth environment. US Steel (NYSE:X), for instance, was trading close to $185 in 2008, but now is trading at low $20s. Walter Energy (NYSE:WLT) was trading close to $145 in 2008, but now is at $17.52.

One-time calamities are events that temporarily affect the performance of a corporation, e.g., an accident that disrupts operations, the shortage of an important material, or a legal dispute that create one-time fallen angels in a particular industry, as was the case with BP (NYSE:BP) a few years ago.

Market crashes are sudden and precipitous declines in an asset or a group of assets that create fallen angels across the board. The table below gives a sample of companies that may be considered as market-crash fallen angels at this point. Freeport-McMoRan Copper & Gold (NYSE:FCX), for instance, is a fallen angel in the recent crash of the copper and gold market. Telefonica (NYSE:TEF), Banco Santander (NYSE:SAN) and National Bank of Greece (NYSE:NBG) are fallen angels of the European market crash. Technology shifts, like the development of new products and processes that replace old ones create fallen angels in the technology industry. The above table gives three companies, BlackBerry (NASDAQ:BBRY), Nokia (NYSE:NOK), and Apple (NASDAQ:AAPL), that have been fallen angels of the technology shifts in the smartphone industry. But how can investors separate fallen angels from falling angels?

The Four Forces That Create Fallen Angels

Company

Business Cycles

Walter Energy (WLT), Ford (NYSE:F), Freeport-McMoRan Copper & Gold (FCX).

One-time calamities

British Petroleum .

Market Crash-panic

Banco Santander (SAN), National Bank of Greece (NBG).

Technology shifts

BlackBerry (BBRY) and Nokia (NOK), Apple (AAPL).

Gabriel Wisdom applies a number of metrics such as consistent theory of growing revenues and earnings, return on equity, free cash flow, and current ratio and short-term liquidity.

Obviously, none of the three companies in the first group meets all three criteria. However, I do like Ford (F), as it is the only company with a strong and accelerating revenue growth--10.30 percent, up from 5.30 percent the previous quarter.

Company

Qtrly Revenue Growth (yoy)

Qtrly Earnings Growth (yoy)

Current Ratio

Operating Cash

Walter Energy

-33.10%

-%

1.47

$330M

Freeport McMoRan

-0.50

-15.20

5.06

3.8B

Ford

10.30

15.40

--

--

Source: Yahoo.finance.com

The same is true when it comes to the bank group, though I would begin accumulating shares of Banco Santander, as it holds a strong global franchise.

Company

Qtrly Revenue Growth (yoy)

Qtrly Earnings Growth (yoy)

Current Ratio

Operating Cash

National Bank of Greece

--

--

--

-2.08

Banco Santander

-9.70

-25.90

--

--

Obviously, none of the three technology companies meets all four criteria. This means that it isn't yet clear that they are fallen or falling angels. However, Apple meets three out of four criteria, so it may be the best bet for aggressive investors anxious to ride the growth of smartphone industry.

Company

Qtrly Revenue Growth (yoy)

Qtrly Earnings Growth (yoy)

Current Ratio

Operating Cash

Apple

11.30%

-17.90%

1.78

$55.26B

Nokia

-20.40

--

1.29

572M

BlackBerry

--

--

2.06

2.30B

Source: Yahoo.finance.com

Bottom line: Business cycles, one-time calamities, market crash-panics, and technology shifts create fallen angels all the time. But due diligence is required to separate the fallen from the falling angels.

Source: Where To Look For Fallen Angels Now