Investors awaiting a market pullback after a nearly relentless six-month rally may be having a hard time identifying which stocks might be ripe for selling.
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Close correlations among stocks—meaning everything moving up and down in unison—has made the investing landscape even tougher. Highly correlated markets make it difficult for investors to diversify portfolios and to hedge in order to minimize losses.
However, analysts at Credit Suisse believe that with risk aversion creeping higher in the markets, this could be a good time to look for companies primed for a drop.
"Given intra-sector stock price correlations and crowded short trades, it can be difficult to identify fresh ideas," the firm's equity research team told clients in a Wednesday note. "In the current environment, volatility levels have come down significantly...and many investors seem to be preferring a wait-and-see tact as we head into Q1 earnings results season."
But the firm believes the market is moving closer to a "risk-off" mentality where some stocks have become more vulnerable.
A list of Credit Suisse's 10 at-risk stocks:
- Covanta , an energy-from-waste company that has "limited visibility" regarding potential acquisitions, thus providing little room for stock movement.
- Glacier Bancorp , a Montana-based community bank that "still has 1-2 quarters of core earnings pressure ahead of it."
- Jack in the Box , a chain restaurant with challenges to profit outlooks because of rising production, or input, costs. Credit Suisse says JACK investors are "already overpaying for the post-refranchising business."
- Masco , a home products manufacturer that will suffer as new construction lags.
- Motorola Solutions , a communications company that will face pressure from limits to government spending it depends on, as well as "little scope for share buybacks" until the second half of 2011.
- Northern Trust , an asset manager credited with "strong capital ratios and a conservative risk management philosophy" but nevertheless burdened by a valuation in stock price that already reflects its strengths.
- Sears Holdings , the retailer with an "expensive" stock price and the only large-cap that Credit Suisse expects to see a decline in EBITDA, or earnings before interest, taxes, depreciation and amortization.
- Seaspan , the marine services provider whose stock has "high valuation."
- USG , a manufacturer of building materials that also will be hurt by a depressed construction industry and "oversupply of wallboard capacity."
- Weyerhaeuser , the Federal Way, Wash.-based forest products company, which despite strong operations is causing Credit Suisse to be "cautious given the 2.5% dividend yield and premium valuation."
Of the companies listed, Sears has the highest amount of short interest at 10.58 percent of shares outstanding, and Credit Suisse ranks it the most difficult to borrow for the purpose of shorting.
Of the other nine stocks, rated on a scale of 1 to 5 from most difficult to borrow to least, all rate either a 4 or 5.
