I wanted to find a list of potential crash-and-burners if the market corrects strongly or even returns to bearish trends. True, we are in a bull market right now, but as the S&P 500 (SPY) reaches toward 1300 resistance, something tells me we should have a list of potential high-flying stocks ready to go down if the economy decides to take another plunge. I wanted to go a little beyond the commonplace and so this is what I did ...
A recent research paper called, "Corporate Governance in the 2007 – 2008 Financial Crisis: Evidence from Financial Institutions Worldwide," published in 2010 shows two findings:
- Firms with higher institutional ownership assumed higher than average risk resulting in larger losses to stockholders during times of crisis.
- Firms with a higher percent of independent boards members were more susceptible to raising funds through dilution which in turn harms share price.
Screening for independent boards is not a feature I have on my screener, so this will not be included.
A 2002 paper called, "The International Evidence on Performance and Equity Ownership by Insiders, Blockholders, and Institutions," did not come to the same conculsions as to poor performance and high institutional ownership. However this paper analyzed markets before the 2007-08 crash so they could hardly report on what had not yet occured. What they did find was the following:
- High insider ownership positively impacts share value. It appears that when insiders have a vested interest in creating share value, prices are positively impacted.
To start our screen we will consider stocks with the following:
- Institutional ownership greater than 90%
- Insider ownership less than 5%
Furthermore, we want to find stocks that have higher risk of missed earnings and possible current overpricing which is dealt with in this article on how to find lower risk/high growth stocks. We will choose among stocks with:
- Forward P/E greater than 40.
The issue of negative growth more fairly valuing high forward P/E stocks will not be taken into account with this screen.
Finally, we want price to book ratios to be more than 1.5. If the share price is too close to intrinsic value, this could lend some support during a crash. Also, we want a very low return on equity. We want the current pricing to be based on forward looking expectations.
- Price-to-book ratios of 1.5 or higher.
- Return on Equity less than 0%.
Before I get to naming stocks, let me be clear on what sort of stocks these are. These are companies that insiders have little ownership in and have high institutional interest. They are generally very high growth stocks expecting to have blockbuster EPS growth next year. They also have very high forward P/E ratios. We are trying to find stocks that will likely travel high during strong bull phases (or already have), but will heavily correct if the market turns hawkish. These are not stocks to run out and short right now during bull rallies.
Potential List of Stocks to Sell or Short During Corrections
- Cephid (CPHD)
- Brunswick Corp. (BC)
- DemandTec Inc. (DMAN)
- Volcano Corp. (VOLC)
- Crown Castle International (CCI)
- Equity Residential (EQR)
- Camden Property Trust (CPT)
- CBL & Associates Properties Inc. (CBL)
- Clear Channel Outdoor Holding (CCO)
- Host Hotels & Resorts (HST)
- Pinnacle Entertainment (PNK)
- FreightCar America (RAIL)
- Terex (TEX)
- AMB Property (AMB)
- Avid Technology (AVID)
- Gaylord Entertainment (GET)
Some Points to Ponder
Again, let me be clear that these are potential shorts partially based on historical studies when you see the market correcting heavily. During bull rallies, when high future growth is expected in the markets and in stocks, these stocks may also outperform on average.
What are some interesting features on this list?
- The expected EPS growth for next year generally ranges between 100 – 200%.
- The EPS growth over the past 5 years generally ranges between -20 and -40%. Only GET, EQR, CCO, and TEX have positive 5 year EPS growth.
- This year EPS growth is all over the board with a few stocks positive such as CPHD, BC, EQR, CCO, PNK, and AVID, while the rest have negative EPS growth this year from -47.87 down to -653.92%.
- High price-to-sales stocks over a ratio of 3 are CPHD, DMAN, VOLC, CCI, EQR, CPT, and AMB.
- Stocks with high long-term debt to equity ratios over 1 are BC, CCI, EQR, CPT, CBL, CCO, PNK, and GET.
- All the profit margins are currently negative.
- These stocks are great performers over the past year.
So how can this list of stock be played? Keep this list close by as you watch the market. If you see the market (S&P 500) unable to reach new highs past 1300. If the SPY sharply retreats, these could be some of your first stocks to sell. If in the near future the market corrects heavily or turns into a bear market again, keep this basket of picks nearby for some potentially huge drops when forecasts are vastly lowered and lofty investor expectation is brought back to reality.
But as always, do your due diligence as screening is just the first in a long list of steps to short stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.