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These five stocks are widely owned and featured prominently in the media. You have, without a doubt, heard of them, and it's very possible you even own a few. But I wouldn't touch any of them with a 10-foot pole.
One of the stocks is a struggling retailer that has failed to turn a profit in the past 12 quarters despite the intervention of deep-pocketed hedge fund manager turned corporate raider Edward Lampert. Bottom fishers may be looking to cast a line after the steep 35% decline in the past month, but it's much too dangerous to own, even at these depressed levels.
I'm also recommending you stay far away from a mega-cap tech company with heavy mutual fund ownership that collectively lost those funds billions since missing earnings estimates earlier this month. Plus, a well-known package delivery service, retailer and Internet content company that all have precarious charts.
Although these companies are very different, they have two things in common.
First, each of these stocks has low relative strength (RS).
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 lower a stock's score, the worse its performance relative to its peers. It's a tool that helps us numerically define stocks in an uptrend or downtrend.
But more important, it has been proven that stocks with high RS are more likely to continue to outperform the market, while stocks with low RS underperform.
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.
The second similarity between these laggards is their poor score on a key fundamental measurement. This score also ranges from 0 to 100, and the higher the better.
It is one of the most important measures of a company's health and also one of the most reliable numbers in finance. While companies can manage earnings to meet analysts' expectations or inflate balance sheet assets using misleading reserve allowances, this metric is much harder to fake.
And a low score means a company could struggle to reinvest in its business, pay dividends or pay down debt.
My stock-ranking system combines an equity's relative strength and this fundamental score, giving the stock a total score ranging from 0 to 200.
The higher the score, the more likely the stock is to move higher in the short to medium term. In just the past 15 months, for example, we've closed positions for 89%, 115%, 135% and even 242% profits by buying stocks with scores between 140 and 200.
The lower the score, the more likely the stock is to lag the market -- or worse -- over the coming weeks and months. And these big-name stocks are flashing some of the lowest scores:
Sales at Gap's (NYSE: GPS) namesake stores have fallen so much the company is shuttering a quarter of them. Its Old Navy stores, which target budget-conscious consumers, are doing well, but with much lower prices than the brand-name Gap and Banana Republic stores, the company's bottom line is feeling the pinch.
Technically, the stock has fallen below both the 50-day and 200-day averages, both of which will now act as resistance. Moreover, the 50-day has crossed below the 200-day, resulting in a sell signal known as a death cross.
But the final nail in the coffin is its score of 81 out of a possible 200 in my stock-ranking system. This tells me the stock is likely to continue to underperform.
Software giant Oracle (NYSE: ORCL) missed on both the top and bottom line when it reported second-quarter results on June 18. Software licensing sales decreased 17% from year-ago levels. While its cloud offerings were strong, investors soured on management's lower-than-expected guidance.
The post-earnings sell-off took shares down through both the 50-day and 200-day moving average on enormous volume. Given this and its meager score of 73, I see ORCL working its way down to at least weekly support between $36 and $39.
United Parcel Service (NYSE: UPS) needs to watch its back as a number of tech-savvy companies are threatening to eat its lunch. Ride-sharing company Uber is testing a package delivery service using its fleet of 200,000 active drivers. And Amazon.com (NASDAQ: AMZN) is rolling out free same-day delivery, testing delivery drones and said to be experimenting with an app that would pay regular people to make deliveries on the way to their destinations.
UPS sports a bearish head-and-shoulder topping formation on its chart. A break of the neckline at $95 would give us a minimum downside target of $78. With a grim score of 61 based on my system, I doubt this technical breakdown is far off.
In its most recently reported quarter, Sears Holdings (NASDAQ: SHLD) said same-store sales fell by a whopping 11%. The company continued to bleed money with a $303 million loss.
While CEO Lampert has spun off portions of the company to try to spark an earning's fire, Sear's retail business remains a wet log. And the stock took a big hit when Lampert said he would spin off roughly 254 stores into a real estate investment trust (REIT), leaving even less value for shareholders.
SHLD is in a long-term downtrend, and its score of 60 says we shouldn't expect a turnaround anytime soon.
While Yahoo (NASDAQ: YHOO) booked $9.4 billion from the Alibaba (NYSE: BABA) IPO in September, investors are concerned potential changes to how the IRS taxes corporate spinoffs will impact plans for spinning off Yahoo's remaining $30 billion-plus stake.
Earnings are on the decline with the company showing a 96% year-over-year drop in its most recent quarter. YHOO is nearly 25% off its 52-week high and flashing a death cross, but my biggest problem with the stock is its dismal score of 23.
According to my system, these five stocks rank in the bottom 30th percentile of the 3,983 stocks I track. Personally, I only recommend stocks with a score above 140.
For example, back in February, the system triggered a "buy" in little-known biotech firm Pharmacyclics (NASDAQ: PCYC), which was flashing a score of 184. At the time, only 50 stocks on the market had a score that high.
Shortly thereafter, it was announced Pharmacyclics would be acquired by AbbVie (NYSE: ABBV) for $21 billion, and we closed out the position with a 55% profit in just over two months.
While the system doesn't purposely screen for buyout candidates, I'm not surprised that a company with such a high ranking on my system was a target.
I've also recommended an airline with a score of 169 that gained 54% in a year, a pharmaceutical stock with a score of 160 that soared 60% in six months, and a coal company with a score of 158 that rocketed 135% in just over 10 months.
If you want to learn more about this powerful system, I've compiled a free report that explains how I use it to spot stocks before they make huge runs in a matter of weeks or months. Click here to access it.
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