5 Bottom Fisher Nightmares (and 1 Dream Stock)

Investors are wondering when the pain is going to end. The S&P 500 has plummeted more than 10% since late December to trade at levels not seen since late 2014. That’s a full-blown correction in just over three weeks’ time. 

It’s hard not to let your emotions get the best of you in a time like this, which is why many investors panic and rush for the exits, willing to sell at any price. They often end up regretting their rashness when stocks bounce back from oversold levels. Even if the market does not fully recover, chances are they could have gotten out at a better price if they had kept a cooler head.

Then there are the bottom fishers who view such selling as an opportunity. They start scavenging the wreckage for beaten-down names in hopes of scoring a great deal.

#-ad_banner-#

But this can be a precarious strategy, even in a solid market, which we are most certainly not in.

Trends tend to persist, and trying to guess when and where a downtrend will stop can wind up being very costly. No doubt you’ve heard the phrase, “Never try to catch a falling knife.”

A wealth of research has proven that stocks that are underperforming tend to continue to underperform.

As one example, AQR Capital Management performed a study looking at U.S. stocks going all the way back to 1927. They found that, at any given time, the stocks that were outperforming 80% of the market continued to outperform for at least the next 12 months. And the bottom 20% of performers continued to underperform over the same period.

At Profitable Trading, we developed a stock-ranking system based largely on this concept of relative strength (RS). Our system combines RS with a key fundamental metric to give stocks a score ranging from 0 to 200. We call it the Alpha Score, and the higher the number, the better.

Stocks with the highest Alpha Scores have gone on to deliver returns of 115% in six months, 135% in 10 months and 242% in a year. But the flip side is just as important. The Alpha Score keeps us out of stocks that are lagging the market — no matter how enticing they may look at beaten-down levels.

Below are five stocks flashing some of the lowest Alpha Scores in the market right now. Each costs less than $10 a share and may seem like a bottom fisher’s dream, but my guess is they will wind up being more of a nightmare. 

In addition to their terrible Alpha Scores, I’ve included a few more reasons you’ll want to stay far, far away from these stocks, including their terrible charts. And after that, I’ll share the name of a stock that is flashing one of the highest Alpha Scores we have ever seen.

Barnes & Noble (NYSE: BKS)
Alpha Score: 18

Increased competition from Amazon.com (NASDAQ: AMZN) and the like is eating brick-and-mortar stores like Barnes & Noble for lunch. Overall holiday sales declined 0.8% due in part to store closures and lower online sales. Sales from its Nook e-reader and digital content during this all-important season fell nearly 26%.

Shares are in a severe downtrend and just broke a three-year support line. 

BKS Stock Chart

Whiting Petroleum (NYSE: WLL)
Alpha Score: 18

The plummeting price of crude oil is destroying profitability for producers like Whiting Petroleum. The company has a large debt load and banks may be unwilling to extend further credit with the industry in disarray. 

The stock has been the subject of analyst downgrades recently, and despite the already extremely oversold condition, shares sliced right through a seven-year support line.

WLL Stock Chart

3D Systems (NYSE: DDD) 
Alpha Score: 24

The past year has been rough for this 3D printing industry leader. It encountered a weak enterprise market due in part to market saturation, it saw the departure of its CEO, and it announced its exit from the consumer market in late 2015. Furthermore, start-up Carbon3D unveiled a technology that is reportedly 25 to 100 times faster than the leading 3D printing technologies.

The stock has been on the decline for more than two years, and shares recently broke five-year support.

DDD Stock Chart

Apollo Education Group (NASDAQ: APOL)
Alpha Score: 30

Falling enrollment and increased government scrutiny of the for-profit education industry have contributed to seven straight quarters of double-digit revenue and earnings declines. That trend looks set to continue, as analysts estimate earnings will fall an average of 27% a year over the next five years. 

APOL’s chart is atrocious, and the company is so bad off it is considering a strategic sale.

APOL Stock Chart

United States Steel Corp. (NYSE: X)
Alpha Score: 40

The steel producer has been hammered on concerns over falling oil prices and a global growth slowdown emanating from China. Lower oil prices reduce demand for steel pipes and drill bits from energy companies, while Chinese manufacturing PMI has been below the important 50 mark for 10 straight months. Plus, the Chinese government’s devaluation of the yuan lowers the price of Chinese steel, which hurts U.S. steelmakers. 

X has been in a downtrend since 2008, with the sell-off intensifying in the second half of 2015 as shares broke a critical multi-year support line.

X Stock Chart

We’re nearly finished with a report containing 30 of the worst Alpha Score stocks on the market today, including the five above. But before I sign off, I want to share an Alpha Score “buy” with you.

Volaris (NYSE: VLRS) is a low-cost Central American airline with a sky-high Alpha Score of 188 (remember that’s out of a possible 200).

The company is growing like gangbusters, has an industry-leading return on equity (ROE) and little long-term debt. And the chart shows a stock in a clear uptrend since March with strong support at $15.

VLRS Stock Chart

I’m not going to sugar coat it for you — 2016 is looking like it could be a rough year for investors. And this is the kind of stock I want in my portfolio as opposed to stocks in downtrends that show no evidence of stopping.

Volaris is actually one of the Top 10 Trades for 2016 based on the Alpha Score. If you’d like to learn more about it and get the rest of this year’s picks, you need to act quickly.

This report will only be available until 11:59 p.m. today. Click here to access the Top 10 Trades for 2016 now.