By Michael Kaye, CFA While the primary focus of this column is to uncover promising investing ideas by sifting through our database, every so often we try to look at the flip side: Stocks that investors would do well to avoid. With that in mind, we devised this week's screen.
We looked for companies that scored poorly in a broad range of categories. We started by looking at the STARS -- the universe of stocks covered under S&P's ranking system. Specifically, we searched for issues with S&P's lowest investment ranking, 1 STARS (strong sell). Stocks with that designation are expected by S&P equity analysts to underperform the broader stock market by a wide margin in the next 6 to 12 months. S&P analysts have assigned that ranking to 33 stocks out of the nearly 1,500 issues in the STARS universe.
Next, we turned to another proprietary S&P tool: Fair Value. Using Standard & Poor's exclusive proprietary quantitative model, which examines companies' earnings, growth potential, return on equity relative to the S&P 500 and its industry group, and other factors, we looked for those issues ranked 2 (modestly overvalued) or 1 (significantly overvalued).
QUALITY CONTROL. Next, we turned to a measure of companies' financial strength: credit ratings. We sifted for those companies with credit rating from Standard & Poor's Ratings Services of BBB- or lower.
And then we turned to one final measure: S&P quality rankings. Those are S&P's appraisals of the growth and stability of a company's earnings and dividends over the past 10 years. Rankings range as follows: A+ (highest), A- (above average ), A (high), B+ (average ), B (below average), B- (low), C (lowest), D (in reorganization), and NR (not ranked). We searched for those companies with scores of B- or lower.
When we ran the numbers, these seven names turned up.
Low Marks All Around
Kaye is an analyst for Standard & Poor's Portfolio Advisors