We looked for companies that scored poorly in a broad range of categories. We started by looking at the STARS -- the universe of stocks covered under S&P's ranking system. Specifically, we searched for issues with S&P's lowest investment ranking, 1 STARS (strong sell). Stocks with that designation are expected by S&P equity analysts to underperform the broader stock market by a wide margin in the next 6 to 12 months. S&P analysts have assigned that ranking to 33 stocks out of the nearly 1,500 issues in the STARS universe.
Next, we turned to another proprietary S&P tool: Fair Value. Using Standard & Poor's exclusive proprietary quantitative model, which examines companies' earnings, growth potential, return on equity relative to the S&P 500 and its industry group, and other factors, we looked for those issues ranked 2 (modestly overvalued) or 1 (significantly overvalued).
QUALITY CONTROL. Next, we turned to a measure of companies' financial strength: credit ratings. We sifted for those companies with credit rating from Standard & Poor's Ratings Services of BBB- or lower.
And then we turned to one final measure: S&P quality rankings. Those are S&P's appraisals of the growth and stability of a company's earnings and dividends over the past 10 years. Rankings range as follows: A+ (highest), A- (above average ), A (high), B+ (average ), B (below average), B- (low), C (lowest), D (in reorganization), and NR (not ranked). We searched for those companies with scores of B- or lower.
When we ran the numbers, these seven names turned up.
Low Marks All Around
Kaye is an analyst for Standard & Poor's Portfolio Advisors