By Michael Kaye, CFA
While the "Stock Screen" column normally focuses on issues that present attractive investment opportunities, once in a while we take a different tack and shine the spotlight on names we believe investors should go out of their way to avoid. This time, we decided to find issues with the weakest marks in three proprietary Standard & Poor's investment-ranking categories.
We began with our STARS system. While you may have to look hard to find sell candidates from analysts at some brokerage firms and research outfits, S&P has a list of 64 stocks (out of the 1,157 we follow analytically) with that designation -- our 1-STAR stocks. Our analysts expect those issues to underperform the S&P 500-stock index by a wide margin in the next 6 to 12 months and to be among the market's worst performers.
That list was only a starting point. We decided to go deeper in our search for some of the least desirable stocks in the S&P coverage universe. From the 1-STAR list, we culled those with an S&P Fair Value ranking of 1 -- issues whose current price substantially exceeds their fair value, according to S&P's proprietary quantitative model. (The model calculates a stock's weekly fair value, the price at which we believe an issue should trade at current market levels, based on fundamental data such as earnings growth potential, price-to-book value, return on equity, and dividend yield relative to that of the S&P 500.)
And to top (bottom?) it all off, we used one more indicator exclusive to S&P -- this one on the sector level. We sifted for those issues in sectors designated "underweight" by S&P, meaning investors should decrease their exposure to those groups.
When we ran the numbers, these six names emerged:
Kaye is a portfolio services analyst for Standard & Poor's