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Strategies & Market Trends : Shorting stocks: Broken stocks - Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Allen Furlan who wrote (2290)	4/30/1999 2:11:00 PM
From: Q.	Read Replies (1) \| Respond to 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.

To: Allen Furlan who wrote (2290)	4/30/1999 10:26:00 PM
From: Ocote	Respond to of 2506

Allen-- The relative strength break list I posted was an exploratory idea for identifying stocks that were severely broken and likely to do poorly over a moderate period of time. It so happened that my list was chosen just prior to a major shift in stockmarket consciousness or "rotation" which has really been remarkable over the past 2 weeks. A whole universe of previously out of favor stock have suddenly come back into favor again. Being a mechanically generated list it was not meant to suggest a particular opinion about any of the companies listed or to presume any further research on my part. Generally, though, one of the organizing principles of this thread is that stocks with low relative strength tend to continue to do poorly, especially when accompanied by poor cash flow. My research into this idea is minimal as I do not yet have access to formal backtesting software. Another idea I am pursuing to generate short candidates, which I think is actually more promising, is to screen for IPO's that drop below their initial offering price. Sorry I can't be much help on TGX at the moment, but will be interested to read up on it a bit. Ocote