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In Focus #70: June 9, 2009


Financial Advisers in Motion; A Primer On the Employment Issues Facing Those in Transition


Retirement Income: Repairing the Damage to Assure the Flow


Train Wrecks of Estate Planning


A Complex Game: The Life Settlement Process
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25 Stocks To Avoid In A Down Market


he 2nd quarter has brought plenty of bad news for stocks and mutual funds. For example, Zenith Electronics lost nearly all of its value in the 2nd quarter - 92.5% -- as the company reorganizes under bankruptcy laws. Sunbeam had accounting issues and lost 76.5%. Coleman is in the process of merging with Sunbeam and it lost 62.5%. Ikon Office Solutions lost 57.9% as it reported that quarterly earnings would miss projections. And Advanced Communications lost 58%.

Likewise, several categories of mutual funds lost money. For example, mutual funds investing in small capitalization companies lost 4.65%, Pacific/Asian stock funds lost 26.75%, diversified emerging market funds lost 20.59%, and precious metal funds lost 16.45%.

As fears of a market correction intensify, one defensive strategy is the familiar "flight to safety" (selling to buy and temporarily hold less volatile "Blue Chip" stocks). The wisdom of this strategy -- following the crowd and attempting to time the market -- is questionable.

We screened for stocks based upon several factors. First, we wanted to see, historically, which stocks performed most poorly in bear markets (relative to other companies in their industry, monthly over 5 years). Second, we were more concerned with stocks that already have risen in price, as opposed to stocks having decreased in price or having stayed flat. So we screened for stocks that had experienced strong upward price movement over the last 12 months (relative strength). Third, we wanted to find the stocks that are popular now, because popularity leads investors to pay more for the stock from a valuation standpoint. So we screened for stocks that currently have price to earnings ratios well above average (we chose a PE of 40). We weighted each of these factors equally.

Based upon that screen, here are the 25 stocks to avoid:
4 Kids Entertainment (KIDE)

American Waste Services (AW)

Banco Central Hispanoamericano ADR (BCH)

Caere (CAER)

Cerner (CERN)

CMI (CMX)

DeKalb Genetics B (DKB)

Electronic Clearing House (ECHO)

Environmental Elements (EEC)

Global Motorsport Group (CSTM)

Golden State Bancorp (GSB)

Handleman (HDL)

Hovnanian Enterprises (HOV)

Integrated Systems (INTS)

International Murex Technologies (MURXF)

JB Hunt Transport Services (JBHT)

Northern Telecom (NT)

Players International (PLAY)

Sharper Image (SHRP)

Starbucks (SBUX)

Thermo Power (THP)

United Foods Cl B (UFD.B)

Valley Forge Scientific (VLFG)

VISX (VISX)

WorldCom (PN)
Several of these companies trade on the New York Stock Exchange and many are well recognized. However, based upon the screen, these stocks may not be the best ones to own in a bear market, and are suitable only for those investors who know, and can bear, the risk of loss.





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