Screening for Shorts

Free screening tools can help you narrow down the 9,000-plus publicly traded stocks to those that fit your criteria. They are only the start of your research. Tom Jacobs uses's screening tool to look for potential shorts.

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By Tom Jacobs (TMF Tom9)
March 14, 2002

The more you learn about investing, the more tools you have for analyzing companies. Most beginning investors feel pretty good -- and rightly so -- once they understand the venerable price-to-earnings ratio. As they become more comfortable with analyzing financial statements, they may discover the joy of free cash flow, importance of enterprise value versus market capitalization, and just what the big deal is about white hot dogs in Rochester, New York.

But once you have all this information, is there any alternative to plowing one company at a time through the universe of 9,000-plus publicly traded companies? Already overwhelmed by email, cell phones, and cable TV, none of us smiles at the prospect of more data.

Enter stock screening tools. They are the investor's Web reward for hours at the computer entangled in wires, hassling with your cable or phone company over broadband, and bribing a smart teen to set up your home networking function. These free Internet tools help you narrow your investing research universe to the few companies to put under your microscope. (Do they still use microscopes?).

Think of screening as using a sieve. You put all your stocks into the sieve whose holes  might say "P/E below 15," "one-year revenue growth over 50%," "market capitalization over $1 billion," or maybe, in my fantasy screener, "The Next Enron." Only stocks that fall through the holes are left.

To illustrate, I'll use's screening tool to begin a search for possible stocks to short. If you decide you can't get enough of screening, play with the screening tool yourself. And if you would like to do this with other Fools online and with help, sign up for our Panning For Gold: Find Great Stocks online seminar.

Short screen
Before getting started, there is no hard and fast rule for screening stocks for any purposes -- buying long or short. When I'm looking for shorts, I want companies whose numbers show declining everything good and increasing everything bad. "Good" is revenue, earnings, and income. "Bad" is debt. I also want stock prices above $5.00. Generally, individual investors aren't able to short stocks below $5 through most brokers. If you want a lot of variables, or to construct your own formulas using common ones as in the Rule Breaker team's Buzzard Bait shorting criteria, you'll need a more involved screening tool, such as Multex Investor's.

I went through a few screens, but I found especially useful for one reason. Once you perform your initial screen and end up with a smaller universe of companies, the tool gives you company data for all the search criteria plus many others. This allows you to exercise more nuanced judgment in areas that you do not view as absolutes.

Beginning on the Stock Search page. You can choose EasyStep Search, which prompts you with questions. Great for the newbie screener. Because I think I know what I'm after, I'll choose Full Search.

In Full Search mode, I decide not to limit myself by industry. Scrolling down to the third section, Growth Rates, I ruthlessly fill in 0% for maximum growth rates for EPS, revenue, and income growth for one, three, and five years. I want companies whose businesses have been miserable for years. True, that eliminates any newer companies that are failing and any old companies facing only recent problems. I choose the longer term to show me companies with a history of trouble, suggesting that management, the industry, or both are just plain lousy, as well as a presumption that no one has bailed the company out yet.

Current cash crunch
Then I scroll down to part five, Financial Strength, because I ardently desire companies facing short-term cash crunches. Two useful criteria are current ratio below 1.0 and quick ratio below 1.0. A good feature of the Quicken screen and some others is that you can click any of the screening terms for an explanation. If you aren't sure what values to use for a term, the Quicken tool provides for each term a drop-down menu with numerical suggestions and "below (or above) industry average" options.

By the way, I would like to find companies with lots of long-term debt relative to equity, but I'm not going to screen for it. Debt by itself isn't a problem; it's whether there's enough cash coming in to service it. Quicken doesn't allow you to screen for operating cash flow or free cash flow, but they do show up once you have initial results and choose the Compare Stocks option. For the initial screen, I'm satisfied to start with current and quick ratios.

Lastly, I require a stock price of at least $5.00. That's a minimum. The Rule Breaker Buzzard Bait screen uses $7.00.

Time to click for results...

No such luck
Ooops! No companies! What did I do? Hmmm. Maybe I was too restrictive. I'll lighten up and instead of screening for declining EPS, revenues, and income for one, three, and five years, I'll stick with revenues, with $0.00 as the maximum for EPS to ensure that I receive companies that are losing money.

Now we're talking. Here are the 11 that pop up:

  • Computer Associates (NYSE: CA), e-business software
  • Daily Journal Corp. (Nasdaq: DJCO), newspaper and magazine publisher
  • FMC Corp. (NYSE: FMC), machinery and chemicals manufacturer
  • J2 Communications (Nasdaq: JTWO), exploits the National Lampoon trademark (What kind of business is that?)
  • Luby's (NYSE: LUB), operates Luby's cafeteria-style restaurants
  • Mapics (Nasdaq: MAPX), software for manufacturing
  • Massey Energy (NYSE: MEE), coal producer and processor
  • Norstan (Nasdaq: NRRD), telecommunications
  • Ross Systems (Nasdaq: ROSS), software for manufacturing
  • Trinity Industries (NYSE: TRN), construction and transportation equipment                      manufacturing and leasing
  • Unisys Corp. (NYSE: UIS), information services

These are not "the eleven stocks to short now!" First, click "Compare Stocks" farther down on the same page to see how they rate according to many more criteria to see just how bad things really are.

Then it's time to read the latest SEC 10-Q and 10-K filings and check for posts on our discussion boards. Has the company hired new management charged with a turnaround? Does that management have a good track record? What is the competitive landscape of the industry? Are any of the companies in cyclical industries ready to rebound? Even though they face near-term financial crunches, do they have other attributes that will give them easy access to more cash?

You also need to find the company's share float (the actual number of unrestricted shares available for trading), average daily volume, and percentage of shares already shorted. With low float and low volume, sometimes you will simply not be able to obtain shares to short, and even if you can, it doesn't take much action to batter the price all over the place. If an updraft raises prices higher, you can find it difficult to cover your short at anything less than a very painful price -- that's a short squeeze.

A very rough first cut eliminates Daily Journal Corp., J2 Communications, Mapics, Norstan, and Ross for wafer-thin trading volumes. Luby's appears to actually have an increasingly good financial position, and Computer Associates's recent large financing indicates easy access to capital markets. I'd concentrate on Massey Energy, FMC Corp., Trinity Industries, and Unisys.         

That's a brief intro to one very idiosyncratic use of screens. I hope you find many others to employ profitably. 

For more on shorting, you may enjoy "The Art of Short Selling" in the latest issue of The Motley Fool Select (subscription required). You can also share shorting ideas with fellow Fools on our Shorting Stocks discussion board (30-day free trial to read, subscription to post).

Tom Jacobs (TMF Tom9) is  unsettled because M&Ms are pastel at Easter. To see his stock holdings (and run screaming), view his profile, and check out The Motley Fool's disclosure policy, which is rated PG.