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Forensic Stock Analysis: The Highest Positive And Negative Scoring Stocks For October

by: JD Henning

New October selections for both Positive and Negative forensic value stocks.

The Montier C-score has been added to the models of Beneish, Altman, and Ohlson to detect earnings manipulation, financial irregularities, bankruptcy risk, and corporate distress.

20 Positive and Negative portfolios have been tested since 2017 with strong evidence of fundamental value return deterioration that may reflect worsening market conditions.

The Positive Portfolios have the best returns beyond the one-year measure, but Negative forensic returns are much higher recently as market conditions are becoming more challenging.

21 stocks from over 8,000 screened have made the forensic parameters detailed below.

Introduction to the Positive/Negative Forensic Value Stock Selections

This quantitative study continues a series of multi-year test of the top three forensic algorithms used to detect bankruptcy risk, earnings manipulation, and financial irregularities. My forward testing compiles portfolio selections from the highest positive and highest negative scoring stocks across the U.S. stock exchanges to measure performance variances between portfolios and benchmark indexes.

The different algorithms created by Beneish, Ohlson, and Altman are well documented from financial literature and rely exclusively on fundamental data including year-over-year operational performance measures. The combination of all three bankruptcy and financial irregularity algorithms creates a unique "deep dive" on key value characteristics and applies a total of 22 different fundamental financial variables for assessment. Now with the addition of Montier C-Score beginning in August, the number of assessment variables has increased to 28.

Prior examples of the application of these forensic financial algorithms can be found in several of my recent articles:

A new "Tesla Test" for October will also be released shortly, be sure to follow my articles for the latest information. The methods and independent detection success of the four different forensic algorithms are detailed in the methodology section at the end of this article.

Negative Scoring Forensic Value Selections for October

A sample of the top 4 stocks out of more than 8,000 stocks screened are the only adverse scoring stocks across each of four Forensic algorithms. The size of this group is down from nine stocks in August with five stocks continuing from the prior report. The results are sorted along the Ohlson O-score probability percentage in descending order.

Based on additional input from a fellow Certified Fraud Examiner and consultant for a big four accounting firm, I started breaking down the forensic scores by industry. This not only provides many additional stocks to consider, but may also reveal key forensic stock patterns unique to sectors, and may even show forensic conditions of each sector in the markets. Remember that only the most extreme adverse and positive scoring stocks are measured by this analysis; that is they must be able to qualify across four different algorithms.

Top Negative Forensic Stocks by Sector (up to 3 stocks)

Expanding the list of negative forensic stocks by dropping the Montier score increases the available stocks to consider from 9 up to 21 stocks.

Symbol Name Sector Beneish Altman Ohlson
(TROX) Tronox Holdings plc Basic Materials −1.90 0.88 68.02%
(VNTR) Venator Materials PLC Basic Materials −0.96 0.62 58.19%
(GSS) Golden Star Resources L Basic Materials −2.21 −1.52 81.28%
(YCBD) cbdMD, Inc. Consumer Goods −0.77 −4.10 96.51%
(GGAL) Grupo Financiero Galici Financial 3.97 0.98 87.23%
(BBAR) BBVA Banco Frances S.A. Financial −1.06 0.74 89.52%
(SUPV) Grupo Supervielle SA Financial −1.84 0.87 91.68%
(CCXI) ChemoCentryx, Inc. Healthcare 24.38 −1.00 64.57%
(PIRS) Pieris Pharmaceuticals Healthcare 4.17 −0.98 85.06%
(RDUS) Radius Health Inc Healthcare −2.07 −3.72 51.90%
(JAN) JanOne Inc. Industrial Goods −1.90 −0.36 59.44%
(GLBS) Globus Maritime Ltd Industrial Goods 28.39 −1.91 69.46%
(BBCP) Concrete Pumping Holdings Industrial Goods 5.62 0.49 70.30%
(PEGI) Pattern Energy Group Inc Oil & Gas −1.25 0.49 53.53%
(GOL) Gol Linhas Aereas Intel Services −1.40 −0.087 93.80%
(VLRS) Controladora Vuela Comp Services −2.14 0.89 77.59%
(QTT) Qutoutiao Inc. Technology −0.51 −0.27 94.40%
(VERI) Veritone Inc Technology −1.91 −2.97 58.45%
(BNFT) Benefitfocus, Inc. Technology −2.20 0.31 54.61%
(VSLR) Vivint Solar, Inc. Utilities −0.27 0.31 85.20%
(CDZI) Cadiz Inc. Utilities −2.16 −8.38 100%

(Source: V&M Breakouts)

Total Forensic Negative Stocks by Sector

(Source: V&M Breakouts)

Charts of the top 4 highest adverse scoring stocks across all four forensic algorithms are listed below:

Aquestive Therapeutics (AQST)


Aquestive Therapeutics, Inc., a specialty pharmaceutical company, focuses on identifying, developing, and commercializing various products to address unmet medical needs. The company markets Sympazan, an oral soluble film formulation of clobazam for the treatment of lennox-gastaut syndrome; Suboxone, a sublingual film formulation of buprenorphine and naloxone for the treatment of opioid dependence; and Zuplenz, an oral soluble film formulation of ondansetron for the treatment of nausea and vomiting associated with chemotherapy and post-operative recovery in the United States and internationally.

Sorrento Therapeutics (SRNE)

Sorrento Therapeutics, Inc., a clinical stage biotechnology company, primarily engages in the discovery and development of therapies focused on oncology and the treatment of chronic cancer pain worldwide.

TherapeuticsMD (TXMD) TherapeuticsMD, Inc. operates as a women's health care product company in the United States. The company's hormone therapy drug candidate is the TX-002HR, a natural progesterone formulation for the treatment of secondary amenorrhea without the potentially allergenic component of peanut oil.

The Medicines Company (NASDAQ:MDCO)

The Medicines Company, a biopharmaceutical company, focuses on developing therapeutics for the treatment of therosclerotic cardiovascular disease. The company is developing Inclisiran, an investigational RNA interference therapeutic that inhibits production of proprotein convertase subtilisin/kexin type 9, which controls LDL-cholesterol levels. It has collaboration agreement with Alnylam Pharmaceuticals, Inc.

Positive Scoring Forensic Selections for October

Out of more than 8,000 stocks screened across all the US exchanges only three stocks qualified this month with positive scores across all four forensic algorithms and with a share price above $2/share.

This is a measure of low probabilities of bankruptcy or earnings manipulation that are being tested to find correlations to price returns over a one-year buy/hold strategy. These three stocks are sorted along the Ohlson O-score for their probability percentage of bankruptcy. There was no overlap from the last Positive Forensic portfolio in August.

These forensic scores do not necessarily forecast stock price growth, though it would seem likely that stocks with low risk of bankruptcy, low probability of corporate distress, low chance of earnings manipulation, and low probability of financial irregularities on deep fundamental analysis should provide a safer value proposition for investors going forward. Joseph Beneish has documented positive returns from favorable Beneish M-score

Charts of these top 3 highest positive scoring stocks across all three forensic algorithms are listed below:

AMREP Corporation (AXR) AMREP Corporation, through its subsidiaries, primarily engages in the real estate business. The company sells developed and undeveloped lots to homebuilders, commercial and industrial property developers, and others. As of July 1, 2019, it owned approximately 18,000 acres in Rio Rancho, New Mexico. The company owns tracts of land in Colorado, including one property of approximately 160 acres planned for approximately 410 homes.

Homology Medicines (FIXX) Homology Medicines, Inc., a genetic medicines company, focuses on translating proprietary gene editing and gene therapy technologies into novel treatments for patients with rare diseases. Its proprietary platform is designed to utilize its human hematopoietic stem cell derived adeno-associated virus vectors (AAVHSCs) to deliver genetic medicines in vivo either through a gene therapy or nuclease-free gene editing modality across a range of genetic disorders.

Twist Bioscience Corporation (TWST)

Twist Bioscience Corporation, a synthetic biology company, manufactures and sells synthetic DNA-based products. The company's DNA synthesis platform enables the manufacturing of synthetic DNA by writing DNA on a silicon chip. It offers synthetic DNA-based products, including synthetic genes, tools for sample preparation, antibody libraries for drug discovery and development, and DNA as a digital data storage medium.

Methodology Review

The purpose of this monthly value selection list is to provide investors with additional tools to evaluate financial irregularities according to three different detection models from academic research. Circumstances surrounding firms are always subject to change, open to extenuating circumstances, and models by their very nature always contain a degree of error.

Again, it is important to stress that firms identified by these academic models may not be in actual distress or suffer from any adverse irregularities whatsoever. These models are certainly not foolproof and were designed by academic researchers to improve the chance of detection of irregularities leading to bankruptcy, earnings manipulation, or flag the presence of financial distress.

At the same time, these models are among the best peer-reviewed forensic models in the financial literature and have some significant documented value.

The Beneish model for example has "correctly identified, in advance of public disclosure, a large majority (71%) of the most famous accounting fraud cases that surfaced after the model's estimation period" (Beneish, Lee, & Nichols, 2013, p. 57).

Further, in a survey of 169 chief financial officers of public companies, Dichev, Graham, and Rajgopal (2012) reported that respondents estimated that approximately 20% of all companies manage earnings to misrepresent economic performance. While three different financial forensic models are applied in the selection of these portfolios, researchers associated with testing the M-score described their approach this way:

Our main hypothesis was that companies that share traits with past earnings manipulators (i.e., those that "look like manipulators") represent a particularly vulnerable type of growth stock. Because of their strong recent growth trajectory, these companies are likely to be more richly priced. At the same time, they exhibit a number of potentially problematic characteristics, indicative of either lower earnings quality or a more challenging economic environment. Although the accounting games such companies engage in might not be serious enough to warrant legal action, we posited that their earnings trajectory is more likely to disappoint investors (i.e., they have lower earnings quality)"

(Beneish, Lee, & Nichols, 2013, p. 57).

To my knowledge no similar longitudinal study of positive and adverse forensic scoring using all three models simultaneously has ever been conducted before. The significant benefits of these portfolios are already emerging in two short months. It is also important to constructively consider why such anomalies may exist in these stock selection at this moment in time. The resulting data which varies from month to month may prompt firms and investors to consider further due diligence of publicly available financial characteristics to mitigate any risk or error present in the marketplace.


20 portfolios (10 positive forensic value/10 negative forensic value) have completed a one-year testing period since July 2017. A clear pattern of declining returns from strong value based forensic selections that analyze 22 different fundamental variables can be seen in the charts below. Initially, portfolio selections produced returns around 100% and have steadily declined over time to some of the lowest returns from the August 2018 stocks.

Whether this pattern reflects stocks that are not participating in current record corporate buyback activity or the marketplace that has been affected by quantitative tightening from the Fed is not clear. A shift toward momentum investing or technical behavioral trading may be overtaking fundamentals in the current environment. Adding the Montier C-score is expected to provide additional discriminant power of the forensic fundamental tests to see if stronger variation between Positive, Negative, and Benchmark Index returns can be identified.

(Source: V&M Breakouts)

Despite strong financial statements, low risk of bankruptcy or earnings manipulation, the Positive Forensic stocks are not generating strong positive returns since 2017 as a value selection tool.

(Source: V&M Breakouts)

In the prior reports, the difference in returns beyond a one-year holding period for the Positive and Negative forensic value portfolios was as large as 32.64%. Through June 2019, this difference was still significant, but was reduced to 18.78%. Into October the difference further declined with Positive portfolios beating Negative portfolios beyond the one-year holding period by only 6.03%. Now into October we are seeing negative forensic scores generally outperforming positive forensic scores across all measures. You can assess what this may mean as return performance is getting more difficult for companies and the S&P 500 is barely 1% above where it was exactly 12 months ago.

Prior tests in the literature of the Beneish M-score have shown the algorithm to generate excellent results on an annual basis for positive scores. Deterioration in the models may be a significant concern for those stocks screened above. The tests continue and more explanations may develop over time.

The prior article for August is available here: Forensic Stock Analysis For August: Do You Own These Stocks?

The June article is available here: Forensic Value Selections For June: Long-Term Positive Picks Beating Negative By +18.78%

I trust this research and stock selections will give you added value to your investment goals and returns in 2019!

JD Henning, PhD, MBA, CFE, CAMS


Altman, E. I. (1968). The Prediction of Corporate Bankruptcy: A Discriminant Analysis. The Journal of Finance, 23(1), 193-194. doi:10.1111/j.1540-6261.1968.tb03007.x

Beneish, M. D. (1999). The Detection of Earnings Manipulation. Financial Analysts Journal, 55(5), 24-36. doi:10.2469/faj.v55.n5.2296

Beneish, M. D., Lee, C. M. C., and Nichols, D. C. (2013). Earnings Manipulation and Expected Returns. Financial Analysts Journal, 69.2, 57-82.

Ohlson, J. A. (1980). Financial Ratios and the Probabilistic Prediction of Bankruptcy. Journal of Accounting Research, 18(1), 109. doi:10.2307/2490395

Disclosure: I am/we are long FNGD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.