The Zacks Rank is one of the premier rating systems used to unveil market-beating stocks. By focusing on earnings estimate revisions and surprises, the system has consistently produced winning stocks. However, that very same philosophy can be turned around to find stocks that will underperform that market, making great opportunities to short.
Same Logic, Different Application
There are 4 factors that go into the Zacks Rank. I am taking the flip side to each piece of the puzzle.
First there is “Agreement”. If each all or a vast majority of analysts continue to submit higher estimate revision, that is a very bullish sign. Obviously, if they continue to submit lower estimates it is viewed as bearish.
Secondly, “Magnitude” addresses the size of these revisions. So, rather than look for large, higher revisions I am looking for large lower revisions.
Next, there is “Upside”. The most recent estimate is considered the most accurate, or the “whisper number.” If this is much lower than the current Zacks Consensus Estimate, you can virtually count on the reported number coming in lower than expectations.
Finally, we have “Surprise”. Companies that have just beat expectations are more likely to beat again. So, obviously I will be looking for stocks that continue to disappoint.
The Specifics
By using the Research Wizard, I screened for short opportunities that meet certain criteria.
– Zacks Rank of 4 or 5
– Negative change in annual estimates
– P/E higher than 25 times
– Negative earnings growth
– Negative return in the past 4 weeks
3 Turkeys to Short
OfficeMax (OMX) sells office supplies, furniture, and tech products to consumers and businesses of all sizes. In the most recent earnings release, EPS came in at 8 cents per share, well under the 14 cents that was expected.
Since then, the Zacks Consensus Estimates has tumbled. Full-year estimates for this year are down 14 cents, to 20 cents. This would be a year-over-year decline of 84%. Next year’s estimates are averaging 48 cents, about one third of 2008 earnings.
Now, if that is not enough, one share is trading at over 54 times forward earnings.
Regency Centers Corp. (REG)is a REIT that owns, operates, and develops shopping centers. Given the level of consumer confidence and the state of real estate, this one looks pretty obvious.
While the trust only missed by 2 cents in the most recent quarter, 69 cents compared to 71 cents, analysts turned extremely bearish. Full-year estimates plummeted to $1.25 from $2.58, over the last 3 months. This would mark a 72% decline on a year-over-year basis.
Winn-Dixie Stores, Inc. (WINN) has over 500 grocery stores located throughout the southern U.S.
In the latest quarterly report, management lowered its guidance after its second consecutive miss. Analyst followed up by slashing estimates. The Zacks Consensus Estimate for this year is just 24 cents, down from 53 cents over the past 2 moths.
Next year’s estimates are averaging 17 cents, a far cry from the 62 cents over the same period of time. Earnings are expected to decline 67% this year and another 31% next year.
Doesn’t sound like a stock worth 46 times forward earnings.
In Closing
Shorting can be tricky, so make sure to check with your broker as the list of marginable securities varies from house to house. Not to mention the interest owed on borrowed stocks.
While those factors can complicate things, after the huge run-up we have seen in 2009 there is no shortage (sorry about that) of stocks that should fall right back to earth.
Additional Resources
Bill Wilton is the Growth Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Growth Trader serviceZacks Investment Research
