Michigan gets a bad rap. When most people think of Michigan all that comes to mind is Detroit and the multitude of problems in that troubled city over the years. The truth is that a lot of good stuff comes from Michigan. We got the Motown sound, Bob Seger and Smokey Robinson from Michigan. Bubba Smith and Kirk Gibson both hail from the Wolverine state. So do Robin Williams and Gilda Radner. Several of my favorite small banks are also located in Michigan.
Also among my favorite things coming out of Michigan are two stocks lists produced each month by the Tozzi Electronic Business and Finance Center at the University of Michigan. The center produces a list of stocks using academic criteria such as momentum, quality, value and predictability. The list of potential longs is called the Value 40 Fund and the short candidates are referred to as "Earnings Torpedoes."
If I was a trader, I would have both lists taped to my wall. The stocks have tended to perform as anticipated, with the longs outperforming and the shorts underperforming the overall market over time.
Why not run your patterns and statistics on lists of stocks that already have the inclination to move in a particular direction? Investors can look for longs on the Value list and avoid or consider selling any of their stocks that make their way onto the Earnings Torpedo list each month. The two lists are incredibly useful tools, but if you ask most investors about the "Michigan lists" they have no clue what you are talking about.
The Earnings Torpedo list is of particular interest to me. According to the website, earnings torpedoes are richly valued growth stocks with the potential for a rapid and precipitous decline triggered by revised information about fundamentals underlying the stock. The list can help find individual stocks that could be ready to fall and identify those sectors of the market that you simply want to avoid altogether.
The list's value to a trader is readily evident when you look at the numbers. The list of 200 stocks has underperformed the market in 10 of the past 15 years. In January, 24 of the torpedo stocks dropped by 10% or more over the next month. In February, 15 of the stocks declined by 10% or more, and in March that number was 28.
Paging down over the last few years I see a lot months where more than half the list of torpedo stocks dropped by 10% or more over the next 30 days. If you are a technical or statistical trader it is like having a list of names with the fundamental characteristics to decline, so running your data and patterns on these stocks should increase your odds of success.
This month, the list is dominated by health care companies, especially smaller biotech firms. Biotech has been strong of late and many of these smaller companies have valuations that border on the absurd. While I am well aware of the potential of biotech and have finally convinced myself that in the next strong correction I need to add a little to my portfolio, this is an area where you must have specialized expertise or hire an outside manager who does. But if you insist on playing biotech roulette and doing it yourself, the stocks on this University of Michigan list might help you from stepping on one of the sector's many land mines.
Energy is still well represented on the torpedo list. In addition to master limited partnerships (MLPs) MarkWest Energy (MWE), Niksa Gas Storage (NKA) and CrossAmerica Partners (CAPL), some of the troubled energy stocks that have already fallen have the potential to further implode. Despite the already huge declines in Magnum Hunter (MHR), Goodrich Petroleum (GDP) and Energy XXI (EXXI), they are still torpedo stocks with the potential to fall further into the abyss.
Tech stocks are also well represented on the list, but in all honesty, with the exception of NetSuite (N), Maxwell Technologies (MXWL) and Sun Edison (SUNE), they are smaller companies I am not at all familiar with. Small-cap tech buyers and traders might want to give the list a quick scan before chasing after some of these companies.
While the University of Michigan Torpedo list is not infallible, it does have a decent track record identifying overvalued stocks that are likely to fall. Short sellers and traders should have the list on their desk all the time. And investors should scan it periodically to avoid getting blown up by a wayward torpedo that finds its way into their portfolio.