(By Kevin Donovan) We are usually an optimistic sort, inclined by nature to take a Panglossian view of investing. But there comes a time in every man's life when he must wake up and smell the coffee and admit that it's not always the rich aroma of Café du Monde French roast and beignets.
No, the cup of Joe this market has been serving up these last few weeks could be mistaken for sheep dip the way it has fumigated the bulls.
So far in May, the Dow Jones Industrial Average is down 6.9%, the S&P 500 has lost 7.3% and the Nasdaq Composite has shed 8.9% through Friday.
So we're taking a break from looking for winners and have resorted to scouting for short sale ideas using the following criteria weighted equally:
- Big Cap (greater than $1.16 billion) – for liquidity
- Price to book value (highest 20% in the market) – to identify potential overvaluation
- One-year annualized beta of 1.5 or higher – for high volatility
- Average 5-day price performance divided by the previous 4-week performance (worst 20% in the market) – for an indication of near-term share price momentum
Our top 5 short sale candidates look like this:
Cirrus Logic Inc. (CRUS)
Power Integrations Inc. (POWI)
Align Technology (ALGN)
VirnetX Holding Corp. (VHC)
Lennox International Inc. (LII)
Source: Historical data, company reports
Of course, investors can jigger the parameters above, use different weights, or use altogether different criteria in screening candidates for short sale.
Our exercise isn't meant as fundamental criticism of any company's worth. Rather, our premise is that if the correction has longer to run, securities still richly valued could be vulnerable to continued market weakness. Indeed, given the dismal headlines from Europe and softer data coming from the U.S. and China, confidence may yet to have hit a bottom.
Here's a brief look at the stocks our screen nominated for short selling
Cirrus, a fabless semiconductor maker, has ridden the coattails of one of its top customers – Apple. Cirrus is up more than 60% in 2012.
Power Integrations, also a semiconductor company, makes products used in power converters. Shares are up 24.8% this year.
Align Technology makes clear align systems for use in dentistry and orthodontics. Shares are up 25.2% so far in 2012.
VirnetX, a software company, develops software and technology solutions for securing real-time communications over the Internet. Shares are up 16.3% this year.
Lennox International makes climate control products for the heating, ventilation, air conditioning, and refrigeration markets. Shares are up 20.8% this year.