From Top to Bottom: S&P Picks the Worst

This week's screen uses S&P's proprietary qualitative and quantitative ranking methodologies to uncover 10 stocks to avoid

A couple of weeks ago, we ran a screen focused on stocks that were S&P's best picks (BusinessWeek, 9/20/07) in the best sectors, based on both our STARS and Fair Value methodologies. We found 10 attractive names.

While our main focus in this column is to identify investment opportunities, one of the things that makes stock screening interesting—and useful—is the ability to turn the criteria around to identify equities that investors should avoid. That's the approach we took this week as we used our top-down, bottom-up approach to uncover the lowest-rated stocks in the lowest-rated sectors.

Let's take it from the top. Right now, only 1 of the 11 S&P 500 sectors—consumer discretionary—carries an underweight recommendation from S&P Equity Research. (The rest of the groups are ranked marketweight or overweight.) So we started by limiting our list to companies in the consumer discretionary group.

Next, we looked for those companies with the lowest scores under our STARS and Fair Value methodologies. STARS is a qualitative ranking system based on fundamental research conducted by S&P's own analysts. We looked for those stocks in the consumer discretionary group that carried S&P's lowest recommendations of 2 STARS (sell) or 1 STARS (strong sell). S&P analysts expect stocks with those designations to underperform the S&P 500 over the coming 12 months on a total return basis and either show no price gain (in the case of 2 STARS) or decline in price (1 STARS).

We then turned to S&P's Fair Value model, a quantitative stock-ranking system. The model calculates a stock's weekly Fair Value—the price at which it should trade at current market levels—based on fundamental data such as corporate earnings and growth potential, return on equity, current yield relative to the S&P 500, and price-to-book value.

Stocks are ranked from 5, indicating significant undervaluation compared with the Fair Value universe, to 1, indicating significant overvaluation. We looked for those issues ranked 2 or 1.

Another top-to-bottom search, another 10 names. Only this time, investors would do well to steer clear:

Company (ticker symbol) Price (10/4/07) (AMZN) $92.26
CBRL Group (CBRL) $40.83
Coinstar (CSTR) $33.32
Echostar Communications (DISH) $47.88
Harley-Davidson (HOG) $48.24
Mediacom Communications (MCCC) $7.16
Superior Industries International (SUP) $22.05
Thomson (TMS) $15.19
Washington Post (WPO) $804.82
Westwood One (WON) $2.89
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