We are in the process of testing a method using Friedrich to identify great short candidates. Among the original "Thrilling Thirteen" that makes up our test portfolio started on August 1, 2017 is Coty (COTY). The closing price on the day we added it to the test portfolio was $20.23. Then the company reported its quarterly earnings before the open on Tuesday, August 22 nd and the stock dropped like a rock.

The data file below was compile on August first but changed little from our previous monthly update.

Notice, if you will, that the Friedrich Super Six Score was "Short". But that is just the starting point.

Next, notice that the Sherlock Debt Divisor was nearly 50 percent higher than the Wall Street Price. That means the company is carrying a lot of debt relative to its working capital.

Badwill stood at 117 percent. That indicates that the company overpaid for assets acquired in mergers.

The combination of these three conditions made this stock stand out to us as a potential short candidate.

The chart below shows price activity for Coty for the last five trading days.

Coty closed at $19.42 on Monday and today the stock got as low as $16.20, it rallied near the close but fell again in after hours trading back down to $16.20. The full change for the day was -17.35 percent from Mondays close to the after hours close on Tuesday.

Of the 13 stocks we chose on August 1 st, seven are down by double figures. The average fall in price per share is more than -15 percent in just 22 calendar days (16 trading days). Maybe we were lucky. But the same set up was present to varying degrees on each company. And the same situation also existed for Valeant Phamaceuticals before it fell from its lofty levels.

We are testing this combination because we found it to be present over and over again in stocks that have crashed. It does not predict all drops, of course, as big misses on earnings reports (among other catalysts) can do a lot of damage as well. What we have found, though, is that when these elements exist together the probability of a company failing to meet expectation rises significantly.

No system is perfect but we believe we may have found another method to help our Marketplace subscribers beat the odds.

Of the thirteen stock short positions we started with on August 1 st only three remain above our entry price, seven are down by double digits, four are down at least 20 percent and two are down over 40 percent. If these results occurred over six months or a year it would be good, but when it happened in 22 days even we have been asounded!

Among our other big winners were Teva Pharmaceuticals (TEVA), AMC Entertainment (AMC), Ascena Retail Group (ASNA), Chicago Bridge and Iron (CBI) all of which are down over 20 percent this month.

It should be obvious (but we will point it out anyway) that this sort of result is not attainable every month because the volume of M&A (merger and acquisition) activity may not create enough new candidates on such a regular basis. Also, even though we update our data every month on over 4,000 U.S. stocks, companies only report once per quarter, so often all that changes in a month is the price of the underlying stock. But as companies report and new data become available throughout each quarter our Friedrich crunches all the numbers and we review the results. You can be sure we will be watching for more short candidates with every update.

Disclosure: I am/we are short AMC, COTY, TEVA, CBI, ASNA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: DISCLAIMER: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.

See the article here:
Coty: Anatomy Of A Short - Seeking Alpha