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Best Stocks for a Down Market

The market has been shaky recently and many gurus are forecasting further weakness ahead. With that in mind, I’m going to describe a stock screen that you could use to find stocks that, based on my research, have the best prospects for producing positive returns in a downtrending market.

Contrarian Strategy Works Best in Down Market

What I’ve found is that, for the most part, a contrarian approach works best. That is, in a weak market, you want to hold stocks that you wouldn’t want in an uptrending market. For instance, in a strong market, your best candidates are those that analysts are advising buying and forecasting strong future earnings growth. However, in a weak market, you’ll do best sticking with stocks that analysts don’t like and don’t think will grow earnings much, if at all, in coming years.

Down Market Screen

Here’s how you can use the free and user-friendly FINVIZ stock screener to find such candidates. If you’re not familiar with the term, a stock screener is a program that allows you to scan the market for stocks meeting your requirements.

On the FINVIZ home page (http://finviz.com/), select Screener to get started. On FINVIZ, you use predefined filters to pinpoint stocks meeting your selection criteria. Select “All” on the Filters menu to see the available filters. Then use the associated dropdown menus to select values for filters that you want to use.

Down Market Screen Setup

Start by selecting “USA” on the Country menu to limit your list to U.S.-based stocks, and “over 1M” for Average Volume to assure that your stocks are trading in enough volume (one million shares daily) to appeal to big investors.  

Stock analysts usually publish “strong buy, “buy,” “hold,’ “sell,” or “strong sell” ratings for stocks they cover. For reasons I don’t have room to cover here, many analysts use the “hold” rating to identify stocks that they are really advising selling. So, isolate stocks out of favor with analysts by selecting “hold or worse” for Analyst Recommendation, and “Positive,” for expected long-term annual earnings growth (EPS growth next five years), which limits your list to stocks with only modest growth expectations.

Even when following a contrarian strategy, you’ll still do best by sticking with stocks that institutional investors such as mutual funds and large banks favor. You can do that by requiring “Over 50%” for Institutional Ownership, which is the percentage of shares held by those big players.

While high volatility can be your friend in an uptrending market, you want low volatility stocks in a down market. For Beta, which measures historical volatility, values above 1.0 signal high volatility and vice-versa. So select “Under 0.5” for Beta to limit your list to the lowest volatility stocks. Since, low-priced stocks are more volatile than higher priced stocks, specify “Over $15” for Price to rule out the riskiest plays.

Sort by Big Money Holdings

That’s it. Click on the Institutional Ownership column to sort the list with the highest values at the top, and then pick the top five stocks by that measure. Here are the five that my screen listed. Here's link so you can see what the screen turns up today.

Down Market Stock List

Restaurant operators Darden Restaurants (DRI) and Dunkin’ Brands (DNKN), medical technology systems makers Cepheid (CPHD) and Illumina (ILMN), and waste disposal services provider Stericyle (SRCL).

As always, consider the results of any screen to be research candidates, not a buy list. Also keep in mind that this screen picks stocks for a weak market. Sell them if the market heads up instead of down.

9/19/16

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