A stellar year for share prices has naturally lead to speculation that parts of the market could be at risk of a correction in the coming months. For those stocks that have ridden the momentum wave during 2013 and enjoyed staggering gains along the way, the severity of any pullback will depend on whether (or how far) their prices have become detached from their underlying fundamentals. This is particularly an issue for ‘glamour’ stocks, where share prices can often be driven to eye-watering levels during bull markets, making them uniquely vulnerable if confidence suddenly evaporates. As Warren Buffett poetically explained: “It's only when the tide goes out that you learn who’s been swimming naked.” With that in mind, we had a look for shares popular among private investors that could see their prices suffer if sentiment does take a turn.
At Stockopedia we take the approach of ranking all the stocks in the market by their Quality, Value and Momentum (QVM) to find baskets of stocks with the best potential to outperform. It’s an approach validated by countless academic research papers and hedge fund practices. We’ve written at length about how high ranking shares - found using these blended StockRanks - have not only performed well this year but may be well best placed to weather market downturns as the market moves towards cheaper, defensive names.
But for the lowest ranking stocks, the outlook is less clear. The market likes to punish low quality, expensive, deteriorating stocks harshly in pullbacks. In order to steer clear of low ranking speculative names, we conducted a search. We looked for low QVM StockRank stocks, excluded natural resources companies (because so many of them have low QVM ranks) and set a minimum market cap threshold of £50 million - you can see the full list here. As always, further research is always needed when screening the market.
Glamour doesn’t pay...
Firstly, with a StockRank of 3 (out of 100), satellite communications business Avanti Communications (LON:AVN) has had a rollercoaster year. Its shares produced a couple of very wild swings on the back of a revenues warning in July followed by upbeat annual results in September. As Paul Scott wrote in July, Avanti is yet to turn a profit which means its valuation hinges entirely…
