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Strategies & Market Trends : Shorting stocks: Broken stocks - Analysis
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To: Allen Furlan who wrote (2290)4/30/1999 2:11:00 PM
From: Q.  Read Replies (1) of 2506
 
Allen, if I can step in, I'll add a few comments.

Re. <<broken stocks , ie a severe RS break, may well be candidates for a buy>>

In O'Shaugnessy's book 'What works on wall street', he reported back-test results for a bunch of one-parameter screens. The screen that produced the worst return (if you owned the stocks) was his low RS screen (which was the stocks with the very lowest 1-year relative performance). The total return averaged something like +1% annual.

You are correct of course that you can often find value stocks among low RS stocks. O'Shaughnessy's screen includes those as well as the bad companies too.

My approach is to improve on O'Shaugnessy's screen by adding multiple screen parameters that eliminate value stocks. Specifically I like companies with little cash & negative cashflow as indicators of liquidity problems, and fairly high price/book and price/sales ratios as well. These companies are typically real basket cases.

You could do a screen for low RS stocks with all the other parameters turned the other way, and you would turn up the value stocks -- good companies with good finances that have beaten-down stock prices.

BTW, I follow Mike Burry's value stock thread, and I favor investing in value stocks, on the long side.
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