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Time to Be a Contrarian?

With the market looking a little toppy, this might be a good time to consider a “contrarian” approach. Contrarian strategies involve picking currently down-and-out stocks that are showing signs that they might be due for a comeback.

Contrarian Screen

Here’s a screen that you can run to find such comeback candidates. As usual, I’ll show you how you could use the free finviz stock screener (finviz.com) to implement the screen.

From the finviz homepage (finviz.com), select screener, and then select “All” on the Filters menu to see the selection filters available to search out stocks meeting your requirements. For each filter that you want to use, use the associated dropdown menus to specify a search value .

Building Out of Favor Universe

First, we’ll create our out-of-favor universe, starting with analyst ratings. 

Although analysts may use varying terminology, finviz sorts their ratings into strong buy, buy, hold, sell, and strong sell categories. However, for various reasons, many analysts rate stocks at “hold” that they really think you should sell. So, use the Analyst Recommendation filter and specify “hold or worse.” Regular readers might recall that in a previous column, I found that hold or sell-rated stocks tend to outperform buy-rated picks.

Next, we’ll use the “52-Week High/Low filter to pinpoint down and out stocks by selecting “30 percent or more below high.”

Finally, in terms of building our down and out universe, we’ll use the Simple Moving Average (average closing price over specified period) to insure that we’re not too late to the party. Stocks trading above the moving averages (MA) are said to be in uptrends and those trading below are in downtrends. Many investors use the 200-day MA to gauge long-term trends and the 50-day may for short-term trends.

Signs of Life

For this strategy, we want stocks in long-term downtrends, but showing recent signs of life. So, for the long-term downtrend part, use the “200-Day Simple Moving Average” filter to specify price below SMA 200.”

Now that we’ve defined our “down and out” universe, we’ll look for the stocks most likely to recover, starting with insider trading.

Insiders are officers, directors and anyone else owning more than 10 percent of a company’s shares. While not always true, significant insider buying often precedes upcoming positive news. Use the Insider Transactions filter and select “very positive” which means that insider holdings have increased at least 20 percent over the past six months.

Next, use the Institutional Transactions filter and specify “positive.” Institutions are mutual funds, banks, and other big players. Specifying positive means that these in-the-know players have increased their holdings over the past three months.

Finally, use the “Performance” filter and select “Month Up” to target stocks that have moved up in price over the past month.

Contrarian Candidates

My screen turned up these four stocks when I ran it.

Two were restaurant operators; Famous Dave’s of America (ticker DAVE) and Noodles & Company (NDLS). Another was medical device maker Medovex (MDVX) and the fourth was consumer finance company Nicholas Financial (NICK).

Click here to which stocks the screen is turning up today.   

As always, consider the results of this screen to be research candidates, not a buy list. The more you know about your stocks, the better your results.

Published 9/11/17

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