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7:00 pm
August 9, 2010
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somrh
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| Member | posts 336 |
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Jae,
I'm curious as to why we should exclude drug companies. In the Montier article (linked in previous post), he says that the high P/S stocks help identify what he calls "story stocks" – companies that are valued based on a story of great future returns. To me, I would think these drug companies (which often come up in my short screens) classify as story stocks. Like the dot coms, I would suggest that some of them will be successful but we have to ask – what will the basket of stocks do? My guess is that they will underperform. I could be wrong. Throwing in a stop loss will help prevent losses due to the success of a few of the drug companies but I think most of them won't deliver.
One thing I've noticed is that many of them are constantly raising funds through share dilution so even if their trials are successful (no guarantee there) and even if their drug gets approved by the FDA (again, no guarantee) and even if they are able to sell it (no guarantee), your piece of the pie with these stocks will be pretty small. The one major risk I see is the possibility of an acquisition by a larger drug company.
With regard to short interest, I'd like to see some research on that. I suspected that to be the case as well (due to possibility of short squeeze) but now I'm doubting it. In an article (which I've only skimmed at this point), there is evidence that high short interest is a good indicator of negative returns. The following article attempts to explain this phenomon.
Why Do Short Interest Levels Predict Stock Returns?
Either way, I think these things should be further researched to see if there are other articles discussing these issues.
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10:30 am
August 9, 2010
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Jae Jun
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Was chatting via email with a reader and he added the following points.
- z-score less than 1.8
- Mkt cap greater than $100mm (less than that
is difficult to short)
- excluding the following sectors:
banking, drugs (balance sheet metrics aren’t as
straightforward/screenable)
- high enterprise value to sales ratio
- short ratio less than 10
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2:56 pm
August 5, 2010
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maxi
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I have linux and have some troubles with the spreedsheats, so I compute m-score and z-score using matlab. When appling m-score to several companies I found that some of them do not inform a depreciation amount, so the DEPI term results undefined (ratio of zero over zero). This term appears in both the 5 and 8 variables m-score, I wonder how Beneish trained the classifier for those companies or if he just didn't include them?
One of the possible short idea could be AMEX:EGO El Dorado Corp. it has m-score of 4.89 and z-score falling hard. However I am not sure if I'm applying the right figures.
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2:00 pm
August 5, 2010
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Jae Jun
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I would appreciate it if you let me know how it goes. I'm interested to know how you would custom create it because the M score has quite a lot of computation between present and previous years.
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12:02 pm
August 4, 2010
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Mike Ivers
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My favorite screening application is Stock Investor Pro from AAII. Since M Score focuses solely on balance sheet variables, I think I'll try making a custom indicator in SIP and screening for it. If I'm successful, I'll let you know what pops up.
Has anyone else tried building a M Score short list?
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1:37 pm
August 3, 2010
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Jae Jun
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I find the M score very difficult to create in any sort of screen. Unless I custom code my spreadsheets and then just run a bunch of companies through it, not sure how to filter out companies with M scores of less than -2.22
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6:44 pm
August 2, 2010
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somrh
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I haven't yet investigated the M-Score so that definitely looks interesting. I'll check have to check out the article you posted here. I also want to read the original article (on just M-Score) but it appears the link on your article (the spreadsheet page) is broken. Do you happen to know the title of the article? I have university access to many online journals.
Granted, the fall semester is starting soon and I'll have to slow down my investment reading and go back to researching philosophy…
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12:22 pm
August 2, 2010
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Jae Jun
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Here is another interesting set of criterias from the Beneish paper. I wrote about the M-score, but a reader brought up the O-score, where O stands of overvaluation.
Here is the paper again. Identifying overvalued equity.
- earnings overstatement (use the M-score to detect manipulation)
- high sales growth
- low operating cash flow to total assets
- acquistion in the last 5 years
- unusual amounts of equity issuance in the past 2 years
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3:43 am
August 1, 2010
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somrh
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| Member | posts 336 |
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In the other thread, I mentioned James Montier's three criteria:
1) P/S > 1 (which is what he uses for your criteria 8)
2) Piotroski F-Score 0-3 (your 6)
3) Total Asset Growth > 10%
Source: Joining The Dark Side: Pirates, Spies and Short Sellers
====
Earlier I did a short screen using the finviz.com screener. Here are the criteria I used:
I. Shortability Criteria
- I have no idea if this helps or not but the goal is to find stocks that one can find shares available to short. The price stipulation was included since many brokerage firms place restrictions on selling below $5 (either it's not available or margin requirements are higher, etc.)
1) Market Cap > 300m
2) Price > $5
3) Average Volume > 50k
II. Quality Criteria
- I'm pretty conservative so I don't want to have to pay dividends on anything I short. The P/S criteria was from Montier. The ROA criteria was there because (1) it caps Piotroski F-score at 8 and (2) Piotroski notes that the ROA criteria (along with the CFO criteria) are the most correlated with market returns of all of his 9 variables.
4) Dividend Yield = 0%
5) ROA < 0
6) P/S > 1
The interesting thing about this screen is that after I found the F-Scores for these firms, the vast majority (82%) were all in the 0-4 range. Only 2% were in the 7-9 range. So Piotroski F-Score didn't add much to this screen.
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9:48 pm
July 24, 2010
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itconsultant
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| Member | posts 34 |
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I thought it would be good to collect ideas from the group on short selling in a new thread.
Jae posted two of them
1) Inventory growing much faster than sales
2) A/R growing much faster than sales
3) Net Income much higher than cash from operations ( This would mean the company is aggressively booking sales and has not collected cash for the sales). Typically you always want CFO > Net Income.
4) Debt is increasing fast. The company is not able to fund growth through free cash flow.
5) Low Z score
6) Low F Score 1-3.
7) M score in the red zone. ( added in the latest sheets)
8) Valuation is rich.
Please add to this list.
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