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Many a trader will repeat the tired adage ‘buy the lows and sell the highs’ as though it is some revolutionary investing insight. Now that it’s July of 2011, these traders can point out a dozen ways that they could have had the foresight to be short the market in September of 2008 before the market was a shambles.

A dozen more traders will point out that anyone who was active at the time should have had the prescience to be long the market at the end of February 2009 when it seemed that the financial world was collapsing at our feet. From here on out, said traders will constantly be watching for the same signs that the market showed in 2008 and 2009 so that they’ll never miss a trading opportunity like that again.

There is a fundamental flaw with their strategy: there will never be a trading opportunity like that again. That’s not to say that the market won’t nosedive ever again, or that there won’t be an 18-month, 100% gain; rather, when it does happen, the signs they’re looking for won’t be identical to the signs of ‘08 or ‘09. If history repeated itself in such a fashion then we would have learned enough in 1987 to avoid the dot-com crash of 2000, this most recent crash, and the inevitable crash of the 2010's or 2020's that is going to blind side the majority of investors (though the heralds of that crash, too, will be so clear once the dust settles).

With this humbled mindset, we at Sabrient have a proposition. Rather than try to make a prediction as to which direction things will be moving over the next 6 months, why not have a portfolio that makes a profit irrespective of direction -- a volatility play with a twist.

To begin with, we choose three industries that are sufficiently disparate so as to give decent exposure to the broad market. From there we use our web-based stock search tool MyStockFinder to find high (low) growth stocks that have strong (weak) earnings quality. We further limit our choices by mandating that each of the longs be rated a Strong Buy and none of the shorts be rated better than a Hold by Sabrient.

Finally, we check how aggressively the management is reporting its financial activities -- we have found that the more aggressively financial results are reported, the more likely the company’s stock is to decline sharply.

The stocks we came up with using our screens are as follows:

Ticker

Company

Position

Industry

TSN

Tyson Foods Inc.

Long

Food Processing

LNCE

Snyder Lance Inc.

Short

Food Processing

DFG

Delphi Financial Group Inc.

Long

Insurance

CVA*

Covanta Holding Corp.

Short

Insurance

MRO

Marathon Oil Corp.

Long

Oil

SD

Sandridge Energy Inc.

Short

Oil

*Depending on the source, Covanta is reported as an Electric Utilities company, a Waste Management company, or an Insurance company. Here, we use its designation as an insurance company.

As can be seen, each industry has one long and one short position. The stocks were chosen from among those that passed the filters we outlined above, and are broken down in more detail below. The idea is that if there is a large bull market in the food processing industry, TSN will advance more than LNCE. Similarly, if oil undergoes a sharp retraction, SD will drop more significantly than will MRO.

Why we chose these stocks:

TSN (Tyson Foods Inc. $18.43): At its current price, Tyson is trading very near its book value (PB: 1.01), with a Price-to-Sales ratio of 0.19 and is trading at less than 7.6x trailing earnings, TSN is a steal.

LNCE (Snyder Lance Inc. $21.53): Our forensic accounting shows that LNCE uses the most aggressive accounting of any of the stocks we have mentioned. In addtion, with LNCE trading at 82.8 times trailing earnings and 17.2 times forward earnings with a Return-on-Equity of only 2.53 (as compared to TSN’s 17.33), it is far overvalued.

DFG (Delphi Financial Group Inc. $28.90): With an almost perfectly conservative accounting score, a trailing P/E of 8.70 and a forward P/E of 7.13, DFG is a screaming buy - even more so once you factor in that it’s trading at a discount to its book value (PB: 0.89).

CVA (Covanta Holding Corp. $16.76): Where to start with Covanta? The trailing P/E is 38.1, the forward P/E is 29.3. Its long term projected earnings growth is just 5%,its Debt-to-Equity is 1.90, and it has been flagged on our aggressive accounting list since mid-2010.

MRO (Marathon Oil Corp. $31.68): With $1.90 of free cash flow per share, and a Return-on-Equity of 13.12, a trailing P/E of 7.27, and forward P/E of 7.67, Marathon has substantial room for upward movement.

SD (Sandridge Energy Inc. $11.20): At current valuations, SD is trading at a substantial premium to its book value (9.88), with negative trailing earnings, a forward P/E of 18.45, a Price-to-Sales ratio of 4.4, tremendous Debt-to-Equity (2.91). In addition to this, SD has the aggressive accounting style that Sabrient has found to be the hallmark of ideal short candidates.

(Note: All prices and ratios shown above are current as of July 18, 2011).

Disclosure: I am short SD.

Additional disclosure: I am employed by Sabrient Systems.

Source: Making a Profit No Matter Where the Market's Headed