The Dog List or The Short List

Posted: Dec 17, 2011 12:01 AM

Many prognosticators come out with top ten stocks you should buy next year. It’s awfully tough to do. I was on CNBC last year and picked two, $ATPG, and $PPC. One is down 58% and one is down 17%. In my defense, I had to pick two real dogs that I thought had a chance to turn around. I think what we learned is that if the market has determined that a company is a dog and the management team doesn’t change, it’s still going to be a dog.

At the end of the year, you look back and with 20/20 hindsight think woulda, coulda, shoulda. As you turn to face 2012, it’s with a tinge of optimism and hope. People always like to think about stocks going up. “What can I buy to beat the market and make money?”, is the question they ask themselves.

When I took a peek at those returns though, I thought, maybe we could make more money shorting than buying? Instead of publishing a list of stocks that we should buy, maybe we should publish some stocks we should short. The Dog List.

The scary thing about shorting is that when the broader market gets good, a rising tide lifts all boats. But what I have noticed about the market this year is that the dogs never keep in step with a rising market. And they always over extend to the downside when the market breaks. It’s tough to pick a beat up stock. There still has to be some money in the stock. A lot of stocks that the market has treated like a red headed stepchild are in the pennies already, and your downside limit is 0.

Conventional wisdom says markets in election years always go up. 2008 broke that convention, and I don’t think 2012 is going to be any better. I think it will be a decent market next year, but not a gangbuster red faced bull. In addition, if Obama starts doing really poorly in polls, his administration will try to enact a lot of executive orders, rules and legislation that will force their big government agenda. That’s not good for business or growth.

Here is our base metric, the S&P. ($SPY, $ES_F) -3.8%
SPDR S&P 500 Stock Chart

SPDR S&P 500 Stock Chart by YCharts

We need to pick stocks that will move to the downside more than we think the S&P will move up or down. Typically, it goes up around 8% per year. As we all know, the last few years have been rocky. It’s going to be rocky going forward.

Here are some real dogs to watch next year.
1. $CME -24% last year. down in 2010, up in 2009, down big in 2008.
CME Group Stock Chart

CME Group Stock Chart by YCharts

If the banking stocks continue to suck air, CME should continue to suck air.

2. $FSLR -76% Solar power
First Solar Stock Chart

First Solar Stock Chart by YCharts

Solar power is overbuilt. It over promises and under delivers. As the global warming mania unravels, solar gets hit even more.

3. $NFLX -63%
Netflix Stock Chart

Netflix Stock Chart by YCharts

Lots of challenges still ahead to this business in a medium that is going to see rapid change. Plenty of room to drop.

4. Hang Seng Index -23%
Hang Seng Index Stock Chart

Hang Seng Index Stock Chart by YCharts

2012 will make Jimmy Chanos a really happy guy. China is over built and the European recession won’t help it.

5. $GM -45%
General Motors Company Stock Chart

General Motors Company Stock Chart by YCharts

Plenty of downside room here. When you pin your future to the Chevy Volt and the government runs your company, your stock doesn’t have a lot of bounce.

What stocks do you think have the biggest potential downside next year?