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The inspiration for this article came from the recent sell-off and got me thinking about stocks that have fallen a large amount in a short period of time. The name for stocks that I just described is a Falling Knife stock. Which according to Investopedia.com a falling knife stock is "A slang phrase for a security or industry in which the current price or value has dropped significantly in a short period of time." The definition goes on to say what causes the situation to occur and the Investopedia definition is "A falling knife situation can occur because of actual business results (such as a big drop in net earnings) or because of increasingly negative investor sentiment." In this article I will be focusing on companies whose share price's have dropped a large amount but have the potential to bounce back because of four factors: Earnings Growth, Management Efficiency, Short-term liquidity, and Valuation.

For my search I will be using the FinViz.com Screener to identify falling knife stocks with potential to bounce back in the future.

Base Criteria:

  • Performance Quarter: -30%
  • Market Cap: Over $2 Billion
  • Average Volume: Over 100K
  • P/E: Profitable
  • Forward PE: Profitable

I started with the above base criteria because I wanted companies that had averaged a decline 10% per month. I wanted to exclude small cap companies so I chose the over $2 Billion market cap option, and I wanted to make sure any of the companies were not a low volume stock so that is why I selected the over 100K volume option. For the final two base criteria I wanted to make sure any company on the list was currently profitable and going to be profitable in the future, so that I why I chose profitable for both the P/E ratio, and the forward P/E options.

Earnings Growth Criteria:

  • EPS Growth This Year: Positive
  • EPS Growth Next Year: Positive

I chose the above two criteria because I wanted any company on the list to have a growing EPS in the short term, as well as growing their EPS in the mid to longer term.

Management efficiency Criteria:

  • Return on Assets: Over 10%
  • Return on Equity: Over 10%
  • Return on Investment: Over 10%

I chose to include the above three criteria because it shows how efficiently management is running the company.

Liquidity Criteria:

  • Current Ratio: Over 1
  • Quick Ratio: Over 1

I chose the above two criteria because I wanted to make sure any company had adequate short term financing to cover any short term expenses they may have.

Valuation Criteria:

  • PEG Ratio: Under 1

This is the final criteria I chose to include and I chose a PEG ratio of under 1, because when a stock has a PEG ratio under 1 it is considered undervalued.

After entering all the above screener criteria, the screener found 5 stocks that met my criteria. They are listed below with a short business summary from Yahoo Finance, along with a table showing the data for the above criteria.

Deckers Outdoor Corp. (NYSE:DECK)

Deckers Outdoor Corporation engages in the design, manufacture, and marketing of footwear and accessories for outdoor activities and casual lifestyle use for men, women, and children.

Fossil, Inc. (NASDAQ:FOSL)

Fossil, Inc. designs, develops, markets, and distributes consumer fashion accessories worldwide.

Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)

Green Mountain Coffee Roasters, Inc. engages in the specialty coffee and coffee maker business. The company sources, produces, and sells approximately 200 varieties of coffee, cocoa, teas, and other beverages in K-Cup portion packs and coffee in traditional packaging, including whole bean and ground coffee selections in bags and ground coffee in fractional packs for use in at-home [AH] and away-from-home [AFH].

IAMGOLD Corp. (NYSE:IAG)

IAMGOLD Corporation, a mid-tier gold mining company, engages in the exploration, development, and production of mineral resource properties. It primarily explores for gold, silver, zinc, copper, niobium, diamonds, and other metals.

Tempur Pedic International Inc. (NYSE:TPX)

Tempur-Pedic International Inc. engages in the manufacture, marketing, and distribution of bedding products in North America and internationally.

EPS growth this year

EPS growth next year

Return on Assets

Return on Equity

Return on Investment

Current Ratio

Quick Ratio

Ticker

Company

Sector

Industry

PEG

DECK

Deckers Outdoor Corp.

Consumer Goods

Apparel Footwear & Accessories

0.61

25.88%

20.75%

21.92%

25.05%

24.35%

6.81

4.62

FOSL

Fossil, Inc.

Consumer Goods

Recreational Goods, Other

0.77

22.20%

16.29%

20.70%

27.66%

26.09%

3.9

2.17

GMCR

Green Mountain Coffee Roasters

Consumer Goods

Processed & Packaged Goods

0.35

127.33%

31.25%

11.06%

20.61%

12.90%

2.36

1.13

IAG

IAMGOLD Corp.

Basic Materials

Gold

0.95

79.68%

28.57%

11.00%

12.67%

12.12%

4.38

3.7

TPX

Tempur Pedic International

Consumer Goods

Home Furnishings & Fixtures

0.87

47.11%

19.54%

28.08%

183.82%

35.41%

2.56

1.97

Closing Thoughts

I used the above criteria to try and lower the high risk of trying to catch a falling knife by trying to find companies with broken stocks, but not broken companies.

What I noticed about the above list is that 4 out of the 5 companies that met the screener criteria were consumer based companies, and more specifically the 4 companies are what I consider consumer discretionary companies, which to me means that their products they make are not a necessity. I can see why the consumer names are on this list because of troubles in Europe, and other problems, but I believe in the upcoming quarter those problems will be offset or partially offset by lower gas prices which will put more money into consumer's pockets and would be more likely to spend it on non essential items.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer