The Ugliest Ducklings of All

 | Nov 06, 2012 | 2:30 PM EST
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All eyes will be on the election today and enough words will be written on the subject over the next 12 hours that I really do not feel thatI can contribute anything new to the discourse. Instead of looking at the election and alleged related trades and investments based on the outcome, I will concentrate on looking for opportunities in the hedged portfolio strategy I discussed yesterday.

As I mentioned in Monday's column, the hedged results of stocks in the S&P 500 that have dropped 50% and those that are down in the past year and trade below book value have been solid on their own. The un-hedged results have been nothing short of spectacular in the short term, returning far more than the market. It just makes sense that these lists would be a fertile hunting ground for trading and investment ideas.

The strongest performers have been the list of stocks that have dropped 50% in the past year with a return of more than 50% in the past six months. By definition this will be a portfolio of stocks that have stumbled badly and are out of favor. The second portfolio was dominated by coal stocks, which is one of the ugliest sectors of the market. The first one was paced by overleveraged telecoms, including Sprint (S) and Metro PCS (PCS). The portfolio this time may be the poster child of ugly, unloved stocks. As the market has worked higher and indexers and ETF traders have kept a firm bid under S&P 500  components, the stocks that have dropped the most have truly ugly fundamentals. It is also the smallest list so far, with just four names that have dropped by 50% or more in the past 52 weeks. It is their ugliness that gives them a chance to bounce over the next few months, but I would not suggest any of these as anything but a potential trade.

In alphabetical order, our first ugly duckling is Advanced Micro Devices (AMD). Nothing has gone right for this company the past few years. Intel (INTC) has steadily taken share from the company amid a weak market for their products -- 93% of AMD's revenues come from outside the U.S. Plus, weakness in Europe as well as the desktop market in China has just crushed sales and profits. The graphics chip division has held its own but it's not enough to return the company to a growth trajectory. On top of its basic problems, it has too much debt for a technology name, which makes it difficult for the company to compete in a crowded market. There is absolutely nothing bullish in the prospects for the company. Any good news could cause a strong pop in the stock because 26% of the float is sold short.

A short-covering pop is pretty much the only reason I can see shares of Apollo Group (APOL) gaining ground. I hate the industry and have been short the stock for more than two years now. About 14% of the float is sold short and many short sellers have covered after the recent price declines. New student sign up and total enrollment continue to decline and the trend will not reverse anytime soon. I think the stock will bottom below $10 but there is always the chance of news driven short term bounce in the stock.

Abercrombie & Fitch (ANF) is on our list as the company seems to have fallen out of favor with the fickle teen and young adult market. They have slowed growth projections and are limiting new store opens. They have been shareholder friendly with substantial stock buybacks and the stock yields a little over 2%. Not a day goes by that I do not hear a whisper of a private equity or leveraged buyout of this company and the rumors could give the stock a last quarter bounce.

First Solar (FSLR) has been on the list since the start of our little project. The shares are still down 50% -- even after a six-month recovery of more than 35%. Conditions may be improving in the solar business but pricing favors the manufacturers of traditional silicon products over First Solar thin film semiconductors. However, the stock has momentum and continued talk of green energy spending might push the stock higher in the short run.

These are the ugliest ducklings we have seen so far. It will be interesting to see if the winning streak for the biggest loser stocks continues. Traders should be able to find opportunities on both sides of these beaten-down stocks.

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