Nothing can be more disconcerting than watching your stock tumble week after week, month after month, as your portfolio value rapidly declines. If there is a serious fundamental flaw to the company, the price may look like a weakening heartbeat as it eventually flatlines. At other times, the company is able to turn the situation around in a surprising reversal.
Are these losing stocks reversal picks that are about to pop? Let’s examine our criteria for picking such losers and a potential for turnaround.
Reversal Stock Selection Process
- Some positive earnings growth.
We will accept any one of the three as a good sign: Positive EPS growth this year, expected positive growth next year, or for the next five years. Remember, EPS does not need to be positive, just the growth.
- Price over $1 and average volume over 500,000
- 50% or more below 52-week high
- 10%+ price jump over past month
Before I get into the list of stocks, one very odd common denominator in all the listed stocks is their small micro-cap status. Here they are in no particular order:
- Arena Pharmaceuticals (NASDAQ:ARNA)
- Conexant Systems (NASDAQ:CNXT-RETIRED)
- A-Power Energy Generation Systems (OTC:APWR)
- YRC Worldwide (NASDAQ:YRCW)
- Corinthian Colleges (NASDAQ:COCO)
- Evergreen Energy (EEE)
- Biodel (NASDAQ:BIOD)
- SinoCoking Coal & Coke Chemical Industries (NASDAQ:SCOK)
Analyzing a Few Financial Oddities
- Apart from the Chinese stocks APWR and SCOK, the rest are from the U.S.
- Keep in mind, these are some of the most dangerous stocks to play with. First, they are off their lows for a good reason. ARNA is struggling to gain FDA approval with potentially devastating consequences. Others have terrible earnings growth over the past five years, such as CNXT, APWR, and YRCW. A spike in earnings may need to prove itself before shareholders buy in with any great force. Also, even rising stocks suffer from the micro-cap problem of raising capital through huge dilution.
- The average recommendation for all the above listed tickers is a hold.
- Many have low insider ownership. BIOD and SCOK have insider ownership above 30%.
- Institutional ownership is an important aspect of providing fundamental support. Companies with over 30% institutional ownership are ARNA, COCO, and EEE. In the 20-30% range are CNXT, APWR, and BIOD. Net positive insider transactions over the last quarter are ARNA, APWR, YRCW, and EEE. Of course, the more institutions own, the more meaningful a percentage increase becomes.
- High short ratio can be a fitting sign of stocks unworthy of higher valuations. It can also provide fuel should the price move strongly upwards. Stocks with a float short 10% and higher are ARNA, APWR, YRCW, COCO, and BIOD.
- Almost all are optionable and can be used with such strategies as listed in this blue chip covered call piece.
Again, while these can be some of the highest risk plays in the market -- namely, micro-cap stocks suffering from one or more serious problems -- they can also be some of the most profitable reversal plays if you feel they are trading near bottom levels and are on the upward climb. But do your homework; check each stock thoroughly, as every one has a reason for being unloved.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.