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Strategies & Market Trends : Shorting stocks: Broken stocks - Analysis
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To: Vol who wrote (1826)10/5/1998 7:32:00 AM
From: Q.  Read Replies (2) of 2506
 
Volunteer, you asked what criteria people can use 'to stack the odds in your favor' when shorting broken stocks.

Other folks surely have different ideas, but here are some factors I typically look for:

technical:
* very low RS (the most important indicator -- this isn't enough by itself to give an average negative return on stock price, but it comes close).
* low market cap (gives you more volatility and higher chance of co. failing to get enough financing to survive.)

fundamental:
* low cash per share and negative cash flow from operations (most important, IMHO).
* negative eps
* high price/book (or low shareholders equity)
* high price/sales compared to peer companies

trading:
* volume > 10 k shares/day
* short interest < 8 days

===================================

the above list is something you can actually use to screen stocks, using for example Telescan's ProSearch.

Debt is actually something that I actually don't pay much attention to. If a co. has long term debt, I consider that an indication that the co. is fairly sound, and I would be less likely to short it. I would rather see short term debt, and in particular I like to see accounts payable growing much faster than revenues.

re. avoiding short squeeze risk, a good preventive measure is simply avoiding taking a big short position in any one stock. That way when you get hit, it isn't bad.
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