Expecting/hoping for a pic of the Morgan Stanley strategist in his beach wear? So were we.
Instead, we’ve got a series of stock screening tools identifying European companies Teun Draaisma thinks investors should either short or avoid.
The MS man has “five ideas:”
- the Joel Greenblatt-Inspired Screen For Shorts: Low ROCE and High EV/EBITDA
A Short Screen that Works in Up and Down Markets Backtest of Shorts Based on Low ROCE and High EV/EBITDA
- Reverse Intelligent Investor (Benjamin Graham Inspired) Screen: Stocks for the Careless Investor?
In March 2006 (Intelligent Investor, Chapter 14) we applied to the European market the guidelines described for value investors in Benjamin Graham’s famous book (in Chapter 14, Stocks for the Defensive Investor). Here we turn several of the criteria on their head to look for potential short candidates — maybe stocks for the careless investor?. Criteria: Market cap above $500mn; Weak earnings track record — at least 1 of last 10 years EPS<0; EPS Growth< 33% last 10 years; Expensive valuation 1) PE: P/3yr average EPS is > 20% premium to market multiple (22.5 now). Expensive valuation 2) PE x PBV is > 20% premium to market multiple (69.7 now).
We have backtested the performance of such a strategy historically. Screening annually with a 6-month holding period absolute performance was negative in 6 of 14 years. In 11 of 14 years the average relative performance was negative.
- The 3 O’s Screen: Over-loved, Over-owned and Over-Valued
Overvalued stocks are within the 100 least attractive on our private equity screen. Over-owned stocks have at least 67% of broker ratings as buys. Over-loved stocks have average relative share volume for last 52 weeks of at least 120% of the 3-year average and have outperformed in the last 12 months.
- Hype Stocks Running Out of Steam?
These stocks are popular, expensive, have high expectations and have rallied recently, but also have weak earnings revisions trends. All stocks meet at least 4 of the 5 hype criteria: in the top third of European stocks in terms of broker rating, 6M performance, PE, PBV, sales growth expectations. In addition, they have a negative and falling earnings revisions ratio.
- Intra-Sector Hype Stocks: Strong Performers, High Valuation, High Expectations but Weak
Revisions
This screen is similar in concept to the previous screen but emphasizes intra-sector divergence and includes financials. Criteria: Stock has above sector EPS growth rate in 07; Stock has a more negative FY1 earnings revision ratio than its sector in latest month; Stock has outperformed its sector in the last 12mths; Stock’s latest relative trailing DY is below 10-year average; Stock is more expensive than the sector based on consensus P/E, P/BV and DY in 08e; Screen ranked on rel DY now versus 10yr average (Lower = Expensive)
The upshot?
Our selection of short candidates. There are 40 Multiple Appearances — stocks that appear on at least 2 screens (see page 5). Of these, Morgan Stanley has an Underweight rating on TUI, Unilever, Metro and Scottish & Newcastle. 4 stocks appear on 3 screens: Ocean Rig, Orpea, Southern Cross and Reckitt Benkiser. In addition we have 5 fundamental short candidates. The common themes across the 5 ideas are excessive leverage and/or cyclical risk. We maintain our shorts in ENEL, Erste Bank and Continental which we opened on January 28, 2008. We open new shorts in Lloyds TSB and TUI which also qualifies on two of our screens.
