2 Dangerous Stocks Investors Should Avoid at All Costs
I constantly scour the market for stocks on the cusp of major bullish trend changes, but over the past few months, there has been little opportunity thanks to the market correction. When the headwinds blow that hard, few ships can sail.
But with stocks rebounding sharply off their February lows and the broader market S&P 500 in the black for the first time this year, my Alpha Trader system is once again lighting up with fresh buy signals.
For those of you who aren’t familiar, I use a quantitative system to rank 6,000 publicly traded U.S. stocks based on a proprietary indicator known as the Alpha Score.
This indicator combines an equity’s relative strength and a key fundamental metric favored by investment luminaries such as Don Yacktman, Warren Buffett and Charlie Munger. Every stock has an Alpha Score, and it can range from 0 (worst) to 200 (best).
I only consider buying stocks in the top 30th percentile, but typically their scores put them in the top 15th, 10th, or even top 5th percentile. These are the stocks most likely to jump double or triple digits in less than a year’s time.
Here are some of the stocks the Alpha Score alerted us to in the past two years:
But just as importantly, the Alpha Score keeps us out of stocks that are lagging the market. While some popular names no doubt seem attractive at current beaten-down levels, the Alpha Score can help us separate the potential winners from those likely to remain losers, such as…
Toll Brothers (NYSE: TOL)
Despite a strengthening U.S. housing market, shares of this preeminent, high-end U.S. homebuilders basically went nowhere for more than three years before breaking sharply lower in early 2016.
The purveyor of single-family dwellings and luxury adult communities has been hurt by rising land costs and firm lumber prices despite the decline in many other commodities. A shortage of skilled workers in the industry is also driving up labor costs.
With shares 30% off their 52-week high, some traders may be tempted to “buy the dip,” but TOL’s Alpha Score of just 42 out of a possible 200 tells me this stock is in for more pain. Its next long-term support level is more than 25% below recent prices, at $22.
Ralph Lauren (NYSE: RL)
The high-end clothier has been slammed by the negative effects of a strong U.S. dollar. In its latest earnings report, the company announced a 39% year-over-year decline in earnings and lowered its full-year revenue guidance from flat to a 3% decline.
The stock, which was already well off its late-2014 highs, got hammered after the report, plummeting 22% in one day on massive volume. This was no selling climax, though, as shares of the troubled retailer just continued on down.
With an Alpha Score of 78, I expect this downtrend to continue. RL could fall as low as $70, the next long-term support line, which is nearly 30% below recent prices.
With much more potential downside, both TOL and RL are clear sells in my book.
I’m not in the business of trying to catch falling knives. Instead, I’m looking for stocks with the highest Alpha Scores and charts like this:
This stock, which I recently recommended to my Alpha Trader subscribers, flashed a buy signal in late February with a huge Alpha Score of 193.
Shares broke out of a long-term base in January on the highest volume in seven years. Even more impressive, this occurred right as the market was tanking. From a technical standpoint, the stock shows the crystal clear hallmarks of a new, emerging leader.
Giving away the name of this stock wouldn’t be fair to my subscribers. But if you’re interested in learning more about how the Alpha Score can put you in winners and help you avoid disasters like TOL and RL, I put together a presentation you’ll want to see. Click here to access it.