Takeaway: We’ve identified 17 stocks that each face significant draw-down risk to the extent our macro themes continue to play out as anticipated.



How Did These Stocks Make the Cut?

As you are likely well aware, we continue to be the bears on domestic equities – particularly the illiquid small-to-mid cap style factor (#Bubbles), consumer discretionary stocks (#ConsumerSlowing), homebuilders (#HousingSlowdown), regional banks (#Quad4 and #HousingSlowdown), as well as commodity-linked equities (#Quad4).


And with domestic high-frequency economic data confirming our views, at the margins, we are inclined to think the market has not yet made an investable bottom – especially given that the overwhelming majority of our interactions with customers over the past week or so have centered on “where to buy as opposed to “where to sell.


While our gauge of buy-side consensus is obviously limited to our large (and growing) sample of clients, we think the fact that hedge funds’ correlation to beta is in excess of +90% on a traling-5Y basis speaks volumes to the fact that there isn’t a ton of differentiation out there from either a sentiment or exposure perspective.




The five key takeaways from our discussions are:


  1. Consensus on the buy-side is still likely positioned bullish. Cutting one’s net exposure to 60% net long from 80% net long does not constitute “getting defensive” in our playbook.
  2. In the absence of true downside capitulation, there is likely more downside to come for the overall equity market. Remember the upside capitulation we saw on $BABA IPO day? We do. Never in history has upside capitulation been followed so quickly by a commensurate degree of downside capitulation.
  3. We’ve been harping on this for months, but the illiquidity risk investors are facing out there is very real. Years of the buy-side taking on liquidity risk to keep pace with a low-variance, high return equity market is a “chicken” that is likely coming home to “roost” before our very eyes.
  4. Moreover, the proliferation of low-cost passive exposure to index beta during the QE era likely means there are fewer stock-pickers in the market ready to defend individual names when entire sectors or style factors are being blown out of.
  5. All told, we think a “short the bounce” strategy is likely to prove more profitable than the consensus “buy the dip” narrative over the intermediate term.


Our Screening Methodology

Understanding all of that, we took it upon ourselves to screen for names that fit our bearish macro themes on the short side; the criteria of our screen is as follows:


  1. Accessible: Traded on a US exchange: 14,064 stocks
  2. A known hedge fund hotel: In the top quartile of hedge fund ownership (as a percentage of float): 3,517 stocks
  3. Worth your/our time to analyze: Market cap > $1 billion: 1,274 stocks
  4. A good story that has played out to some degree: In the top quartile of Bloomberg consensus NTM revenue revisions on a YoY basis: 228 stocks
  5. With cracks developing in the thesis: In the bottom quartile of Bloomberg consensus NTM revenue revisions on a QoQ basis: 38 stocks
  6. Illiquid: The trailing 3M average daily turnover in this sample of 38 stocks is $73M; and that includes Netflix, which is actually quite liquid at $977M. These figures compare to an average trailing 3M average daily turnover for S&P 500 constituent stocks of $223M.




The 17 names highlighted in the chart below are those from the list of 38 that have at least 20% downside to their respective trailing 52-week lows. Obviously that’s an arbitrary point to anchor on in the context of the market going straight up for two straight years, but it’s at least a consistent frame of reference to gauge further downside (many of the 38 stocks in our screen have already corrected or crashed from their 52-week highs). The trailing 3M average daily turnover in these names is a “whopping” $53M.




Now that the top-down work is complete, let us know if you’d like one of our senior industry analysts to do the bottom-up work on any one of these names for you (for a fee, of course).


Happy short-selling!




Darius Dale

Associate: Macro Team

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