In searching for stocks sharing bullish fundamental and technical characteristics, I used Fidelity's "Good Relative Strength" screen. The main fundamental criteria this screen uses is projected EPS growth over the next 1-5 years of 15% or more; on the technical side, the screen looks for S&P relative strength greater than or equal to 80.
Looking at the hedging costs of the top stocks in this screen, something caught my eye: Those costs were extremely high for one of them, Titan International, Inc. (TWI). Last month, when we saw similarly high optimal hedging costs for Sears Holding Corporation (SHLD), we noted that it might be a red flag in a tweet on December 18th. Later that month, Sears shares dropped on negative news about store closings and weak Christmas season sales. It will be interesting to see if Titan International's high optimal hedging costs end up being a red flag for it going forward, despite its high projected EPS growth and good relative strength ranking suggesting otherwise (not to mention Titan's positive news earlier this week, a $100 million contract for its tire subsidiary to supply Caterpillar (CAT)).
The table below includes Titan International and nine other stocks that topped this screen, and shows their respective relative strength rankings, along with the costs of hedging them against greater-than-26% declines over the next several months, using optimal puts.
For comparison purposes, I've also included the cost of hedging the SPDR Dow Jones Industrial Average ETF, (DIA). First, a reminder about what optimal puts are, plus a note about why I've used 26% as a decline threshold; then, a screen capture showing the current optimal puts to hedge the stock mentioned above, Titan International Inc.
About Optimal Puts
Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a finance Ph.D. to sort through and analyze all of the available puts for your position, scanning for the optimal ones.
In this context, "threshold" refers to the maximum decline you are willing to risk in the value of your position in a security. You can enter any percentage you like for a decline threshold when scanning for optimal puts (the higher the percentage though, the greater the chance you will find optimal puts for your position). 26% was the lowest decline threshold against which it was possible to hedge TWI (i.e., the cost of hedging TWI against a greater-than-25% decline was itself greater than 25%, so Portfolio Armor indicated no optimal puts were found for it). Because of that, I've used 26% decline thresholds for each of the names below.
The Optimal Puts For TWI
Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of TWI against a greater-than-26% drop between now and July 20th. A note about these optimal put options and their cost: To be conservative, Portfolio Armor calculated the cost based on the ask price of the optimal puts. In practice an investor can often purchase puts for a lower price, i.e., some price between the bid and the ask (the same is true about the other names in the table below).
Hedging Costs As Of Thursday's Close
The hedging data in the table below is as of Monday's close, and is presented as a percentages of position values. The S&P Relative Strength data is as of Thursday's close as well.
|S&P Relative Strength|| |
|NOG||Northern Oil and Gas||86||7.15%*|
*Based on optimal puts expiring in June
**Based on optimal puts expiring in July
***Based on optimal puts expiring in August
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.