mardi 1 mars 2016

Another way to find attractive stocks

A strategy that could produce good results in the medium/long term is to buy great stocks that are heavily shorted after a bad quarter or some bad news.

What does "stocks heavily shorted" means? It refers to stocks that are sold before being bought. In other words, some people sell stocks today thinking that they'll be able to buy them at a lower price in the future.

I've never done any short selling. I'm not comfortable at all with that approach. But even if you're not comfortable with it, short selling could serve you to identify stocks for which there's an exaggerated pessimism.

When a company is hated, it may also be shorted. What about Valeant, the most hated stock in the recent history of capitalism? I'd thought it was impossible but Valeant seems more hated today than it was 3 months ago. But strangely, Valeant is not that shorted. For a stock supposed to go to zero, there's not so much people thinking that they could do a homerun by selling Valeant at 88$ today and buying it at zero in a couple of days.

High number of short sellers happened in the recent past with Home Capital Group and CGI Group (remember the Obamacare fiasco?). Both were and still are great companies. But even great companies face some difficulties or simply face a short seller with lots of exposure.

A couple of years later, all seems forgotten for CGI for which the PE ratio has expanded a lot. Human is a forgiving creature.

So, here's an interesting way to chose stocks from a list of heavily shorted stocks:

1- Type "shorted stocks" on google (for a specific stock, go to, type the name of the stock and watch the percentage of the float which is short)
2- Look for familiar companies on the list;
3- Take a look at the ROE of the familiar stock for the last 5 years (on;
4- Take a look at EPS growth for the last 5 years (on reuters too);
5- Read recent news to understand why the stock is so heavily shorted. If it's related to a single event or a single analyst that benefits from lots of exposure, the situation is probably not that critical. Perhaps you should even buy that hated stock. 

Which known stocks are shorted these days? (source: morningstar, which is not the most accurate website in my opinion, but it's better than nothing). The percentage of the float which is short is indicated besides the name of the stock.

1- Mylan (13,2%)
2- Mattel (13,4%)
3- Fastenal (16,2%)
4- W.W. Grainger (17%)
5- Carmax (19%)
6- David's tea (19,4%)
7- Lululemon (21,8%)
8- Portfolio recovery and associates (23,3%)
9- Tesla (28,6%)
10- Chesapeake Energy (45,8%)

Usually, when stocks are shorted, it's for a reason. Most of shorted stocks are not appealing. Most are crappy stocks. But sometimes, there's a Home Capital Group or a CGI in the list. In the list above, there's Mylan, Fastenal, Mattel, Carmax and Grainger. I wouldn't bet against them. I'm not a specialist of these stocks (although I've owned some shares of Grainger in the past) but they all look pretty solid companies in my view. I'd rather bet against a shitty company that never achieved some consistency in it's results. If you ever bet against something, bet against crap.

And if you're like me, check for gems that are mistaken for crap. It doesn't happen so often, but it happens enough to keep an eye open.

5 commentaires:

  1. Dear Pen,

    FYI, another way to find attractive stocks is to watch BNN Market Call Tonight next Monday, March 8, 2016 with Jason Donville...

    I am waiting his comments on health stocks following last several months... And his top picks... CXR? PHM? CRH?, VRX? or NHC?

    An IT pick? CSU, GIB.a or OTC...

    We 'll see next Monday...

    Value Man

  2. Thank you. Hundreds of worshipping fans will be watching.

  3. CXR is practically a guarantee given how much he liked it at $53 last time (and there is no fundamental news for why it slumped at $40).

    Unlike Pen, while I still believe on CXR, I am running out of patience on VRX. I have not sold as I keep thinking we must be close to the bottom and see some value fundamentally. Only real accounting update is extremely insignifcant (10 cents less in 2014 vs 9 more in 2015) - but SEC investigation, terrible Management communication, delayed reporting, huge $30B debt is hard to remain positive. May be best bargin in long time now but there are serious downwards risk. I doubt we will top pick VRX but am interested in his comments. Anyone else still holding patiently? buying as bargin of the decade? sold and gave up (what else did you buy CXR, CRH?)?

    Last time he had FRU as top pick. I did not check that stock out - but with oil rebounding for now from $28 to $35, I suspect that he may top pick an oil stock again; the same one or another one, maybe DEE (he picked that one a while ago). He said at one point oil will become time to invest in it; I suspect it may come now. I have zero commodities stock in my portfolio myself but notice some sector rotation as some of my fav (CSU, ATD, etc) are dropping for no reason.

    Maybe he re-top picks CRH. He really likes that one - it went up quite a bit since his last appearance.

    Maybe he top picks MTY again. I am reading "Market Master" now and he mentions MTY in his chapter. He top picked it a few appearances ago and it stayed stuck at ~$30 despite 15% div increase and a pretty good quarter. I have been holding it for a few years since $23. I feel better about their chronic negative SSS after reading his Market Master interview. He may think MTY is a good value in this uncertain environment given business executes well but share has not followed.

    CSU is mentioned three times in Market Masters and is my top holding by far! I added some in mid Jan at $448 and $470 for my wife and kid RESP and it recovered after another solid quarter. It is already Donville's top position in his fund so my sense is he views it as a core position but not one that he recommends adding to aggressively. From last time, he is looking for 'next CSU, next ESL' so I don't think CSU will be his top pick.

    Maybe GIB. Waiting for acquisition. Maybe prices are too high. In mean time, they just made a $400M acquisition yesterday.... in itself by buying back 7M shares. Maybe he would top pick again saying it can make a huge acqusition any day now and valuation is reasonable.

    Without any knowledge, my prediction: CXR, some oil stock, MTY.... Yours?

    1. Congratulations!

      Jason's pick were CXR, MTY & GIB.a !

      Good night...

  4. I don't know but CXR is still pretty cheap. I'd bet on that one. And the last results of CSU were excellent. So these two should be "buy" or "top pick". But Donville can't move that much the needle on those large caps. When he's talking about his favorite small caps, he can make the difference on his own holdings.