5 of the Worst Stocks to Own in 2016
Today, I want to talk to you about five of the most widely owned stocks in the market. You have, without a doubt, heard of these companies, and it’s very possible you even own a few.
Despite being featured prominently in the media and being held by some of the world’s top investment gurus, I wouldn’t touch any of them with a 10-foot pole.
These stocks are likely to lag the market — or worse — over the coming weeks and months. Simply put, they’re not places you want to have your money as we head into the new year.
Although the companies are very different from one another, they have one thing in common: some of the worst Alpha Scores I’ve ever seen.
If you’re not familiar with the Alpha Score, it is an indicator that combines a key technical ranking and a key fundamental ranking so we can quickly compare a stock against all others in the market.
For the technical component, the Alpha Score uses relative strength (RS), a quantitative measure of trend strength. Relative strength compares the price performance of a stock against every other stock in the market over the past six months.
A stock’s RS can range from 0 to 100. The higher a stock’s score, the better its performance relative to its peers. The lower its score, the worse its performance.
It’s a tool that helps us numerically define stocks in an uptrend or downtrend. More importantly, though, extensive backtesting by a number of studies shows stocks with high RS are more likely to continue to outperform the market, while stocks with low RS are more likely to continue underperforming.
In my premium Alpha Trader service, we specifically look for stocks with a RS score above 70, meaning they have outperformed 70% of the companies in our database during the past six months. Having this parameter ensures we’re only buying the market’s best-performing stocks.
The fundamental component of the Alpha Score is based on cash flow, but it’s not as easy as simply looking at a company’s statement of cash flows. In the interest of time and space, I’ll save a deeper discussion of this component for another day. But suffice it to say, we’re looking for companies that score higher than 70% of all other companies for this metric as well.
When you combine RS with the cash flow metric, you get a stock’s Alpha Score, which ranges from 0 to 200. We only recommend stocks with a score over 140 and the higher the score, the better.
So when we see stocks with scores like the ones below you can bet we’re staying far, far away.
These big-name stocks are flashing some of the lowest scores I’ve ever seen. Yet their brands’ popularity keeps investors trying to catch a falling knife.
Just look at the ugly written all over the next two charts:
I want to take a moment to single out Micron Technology (NASDAQ: MU).
Back in October 2013, the company had an Alpha Score of 181 and was recommended as a “buy” to subscribers. For the next 15 months, the stock rocketed higher until, eventually, its outperformance began to slow and its Alpha Score started to break down.
In early 2015, Micron’s RS score fell below 70, and the system required us to sell. All in all, subscribers walked away with an 88.5% profit.
And look what happened after we sold…
Since the Alpha Score’s “sell” signal, shares of MU have fallen more than 50% and its Alpha Score is now a paltry 55. This example showcases the Alpha Score’s effectiveness at timing stock purchases and getting us out when the trend changes.
Each of the five stocks mentioned above is likely to continue to underperform — or worse — for at least the next few months. In fact, their scores are so bad they may wind up being some of the worst performers of 2016.
If you’re in search of better places to put your money as we head into the new year, we just released the Top 10 Trades for 2016 based on the Alpha Score. These stocks all have scores between 166 and 189 — some of the highest we’ve ever seen.
If you want to learn more about the Alpha Score and how to access the Top 10 Trades for 2016, follow this link.