Harry Domash's Winning Investing

Contrarian Strategy for Weak Market

For the stock market, August and September are typically two of the weakest months, and this year is turning out to be no exception.

So, I’m making what is hopefully a safe bet by repeating a stock selection strategy that I first published just a little over two months ago, on June 2. Why?

From June 2 through August 21, that five stock portfolio returned 17% compared to the S&P 500’s 3% return. It’s a contrarian strategy, meaning that it involves buying stocks that most stock analysts are advising selling. Here are the details.

Use Finviz Screener

As usual, I’ll use the free Finviz stock screening program to describe how to build the portfolio. Why? The Finviz screener is free, user friendly, and offers a wide range of useful screen selection choices.

Start by selecting “Screener” on the toolbar located near the top of the Finviz homepage (finviz.com).  Then select “All” on the Filters bar to see the available screening filters. 

Set Up Screen

Because the U.S. economy is currently the strongest, limit your list to U.S. based stocks. Do that by using the Country filter and specifying “USA.”  

When "Hold" Means "Sell"

Next, limit your list to stocks that most stock analysts are advising selling. Here’s how.

Although analysts use a variety of terms to describe their buy/sell opinions, Finviz boils them down to “strong buy,” “buy,” “hold,” “sell” and “strong sell”. Except for “hold,” the meanings are self-explanatory.

However, to avoid annoying company executives, many analysts rate stocks at “hold” when they really mean “sell.” Consequently, for our purposes, “hold,” “sell,” and “strong sell” all translate to “sell.” Thus, specify “hold or worse” using the Analyst Recommendation filter to limit your list to stocks analysts are advising selling.

Earnings Growth Drives Share Prices Up

I’ve found that share prices track earnings per share (EPS) closer than any other single factor. However, even though they’ve forecast strong earnings growth numbers which should drive share prices higher, for reasons unknown, many analysts rate those same stocks at some variation of "sell."

So, specify “Over 30%” for EPS Growth This Year and “Over 25%” for EPS Growth Next Year to limit your list to stocks expected to be the fastest EPS growers.

Profits Count

All else equal, stocks issued by profitable companies typically outperform unprofitable stocks. So, use the Return on Equity filter, which compares Net Income to Shareholders Equity, and specify “Over +5%” to limit your list to profitable stocks.

Follow Smart Money

Institutional buyers such as mutual funds and hedge funds typically have access to information that we never see. So, specify “Positive” for Institutional Transactions to limit your list to stocks that these ‘wired-in’ players have recently been buying.

Avoid Cheap Stocks

Contrary to what you might think, cheap stocks get that way for a reason and tend to underperform. So, specify “Over $10” using the Price filter to rule out the cheapest plays.

Make Trend Your Friend

Finally, since share prices tend to move in trends, use the Performance filter to specify “Month Up” and the Performance 2 filter to specify “Week Up”  to limit your list to uptrending stocks.  

Down Market Yields Only Two Picks  

Only two stocks passed these tests when I ran the screen on August 28. Both pay significant dividends.

Cal-Main Foods (CALM): Egg producer pays a 6.3% dividend yield.

Crescent Energy (CRGY): Crude oil and natural gas producer pays a 4.7% dividend.

These are my ideas, but do your own due diligence. The more you know about your stocks, the better your results.

published 8/22/23


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