15 Stocks To Avoid Based On Valuation, Momentum And Trading Volume

Summary

• Here is a new article with unknown short candidates. I find these stocks by ranking them on valuation metrics, momentum and trading volume.
• My impression is such stocks are declining but without many investors speculating on catalysts for the stock to decline. So no crowded shorts.
• I discuss 6 stocks in more detail below.
• Looking for a helping hand in the market? Members of Global Deep Value Stocks get exclusive ideas and guidance to navigate any climate. Learn More »

Like last month and the month before I ran my quantitative algorithm to find new stocks that should be avoided. This algorithm ranks stocks on several criteria: valuation metrics, trading volume, momentum and a metric for measuring how much trading is affected by events. For details see this blog article.

See results below for this month:

With 6 stocks Japan is well represented in the list. Japan took similar monetary stimulus measures as the US and Europe. It did that even though corona did not affect the country as much as the US and Europe. As a result the Nikkei index increased even more than the S&P 500. The decline started at the same time as the decline of the S&P 500. So far this decline was also more than the decline of the S&P 500.

If we look at the yen, it seems more than 5 years of excessive monetary stimulus might have been too much for Japan since recently the yen sharply declined:

The Japanese yen might further decline resulting in lower stock prices for Japanese companies purchasing goods from abroad. In particular, a rising oil price is another negative for shares of the 2 Japanese airline stocks in the list: ANA Holdings (ticker 9202 in Tokyo) and Japan Airlines Co (ticker 9201 in Tokyo).

A large part of the operations of Seibu Holdings (ticker 9024 in Tokyo) are tourism and public transport in Japan. Tourism and public transport might pick up fast when everybody takes a vaccine. But the real problem is probably the company has too much debt. Even in good times it takes too long to repay the debt. Right now Tangible Assets/Tangible Equity is more than 5. In the current low interest rate environment that might be bearable but if this crisis causes interest rates to increase this company has a big problem. Even with larger profits in good times the EV/EBIT multiple would be high, so for a short seller this could be a good valuation short against a long position in the Nikkei.

Debt should not be a problem for Benesse Holdings (ticker 9783 in Tokyo). A large part of the business is education. That business was much affected by corona, so I guess the problems are temporary and the stock will rebound. But there might be something only Japanese know. See the chart below. Let me know what you think:

With Hong Kong listed China Tower Corp (ticker 788) the problem is financial distress. The current ratio is extremely low; there is hardly any cash and lots of mostly current debt. What helps are strong free cash flows but I do not think these cash flows are strong enough to improve investor sentiment. In principle this stock can be shorted if you can borrow the shares. Financially distressed stocks usually trade well below P/B = 1. So at the current P/B of nearly 1 this could be a good short.

Michael Boyd has an interesting article on Phillips 66 Partners (PSXP). This company invests in fee based energy assets, such as pipelines. Michael Boyd describes in his article there is a hidden potential liability with a 25% owned pipeline. If this pipeline had to be permanently shut down the company would lose $250 million in EBITDA and would have to repay $625 million of off-balance sheet debt. A more detailed article on this pipeline issue is from the "Seeking Profits" service. And see also paragraph Off-Balance Sheet Arrangements and the risk factor in the annual report. But on the upside the unit holders might be bought out by the general partner, according to Michael Boyd.

To me the reason for the stock price decline is also an over-leveraged balance sheet with a very low current ratio, hardly any cash and lots of current and non-current debt. I think the EV/EBIT multiple is too high for the stock to provide good value for shareholders. The reason for the high stock price is probably the high yield. That makes the stock even more attractive for short sellers: prices of high yield stocks can suddenly decline when the company suspends the yield. When looking at the cash flow statements of the last 10 reporting years I think the current dividend is unsustainable. The dividend is more than what the company earns minus what it minimally needs to spend on capex. I expect it needs to be cut in half at least. The company might cut the dividend when negative expectations for this pipeline materialize. And yes the general partner might buy out the unit holders but why not wait until after a negative pipeline event.

On the positive side the company will complete a new pipeline soon. I think that pipeline will start earning money for the company in the second half of 2021. But since in the annual report construction-in-progress is only $394 million the impact on earnings might be limited. Finally another positive is that most debt has fixed rates, so in the next couple of years the company will not be much affected by rising interest rates. But if interest rates keep rising the company might dilute well before it needs to repay fixed interest rate debt as a precaution.

I have made remarks on Air France KLM (OTCPK:AFLYY) several times. The company has negative book value and a mountain of debt. Holders of the shares will not receive any dividends since the company's earnings capacity is not enough to repay the debt. It is only still in business because the Dutch and French government keep it on a cash infuse. The company has taken some measures to save costs but I do not think they could and should have done much more.

The recent share price strength is amazing. I think this is the result of new money from pension funds investing in major indices. According to a column in my Dutch newspaper the real value of the stock is a symbolic €0.01 but maybe the Dutch and French governments will buy shareholders out. So maybe they will give away another €2 billion, on top of all those unnecessary billions already paid to other stakeholders: employees, banks and lease companies.

In the Netherlands there will be elections this month. There is a lot of uncertainty around the outcome of these elections, although the polls favor the right wing party of the prime minister. In any case I do not see new Dutch support for the company until a new coalition government is formed. That might take 6 months or so. I expect investors to become more realistic during these 6 months. So I still think this is a strong sell.

Final words

Many investors are holding battlefield stocks, such as the 4 travel and transport stocks and Phillips 66 Partners discussed in this article. With such battlefield stocks it is good to consider momentum, volatility and valuation based on simple metrics. If that mix is not good, then it is wise to sell such a stock.

Analyst’s Disclosure: I am/we are short AFLYY. 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.

Global Deep value stocks is a long only newsletter. I do not discuss ideas like the ones presented here at Global Deep Value Stocks.

Comments

[4corners]

Agree on your analysis for PSXP.

[Tawm]

thank you for sharing your analysis. I can understand several of the international air carriers, but would you care to explain why KMI is on your list? Pipeline seems to be a good business

[Ruerd Heeg]

The list is pure quantitative, so not based on any forward thinking. As shown in the table Kinder Morgan is a mix of poor momentum, overvaluation and high trading volume. I have not looked into KMI specifically.