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.
A look a Coty on August 4th
The data file below was compile on August first but changed little from our previous monthly update.
The Signs from Friedrich
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 Monday’s close to the after hours close on Tuesday.
Test Results from our Friedrich Model Short Portfolio
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…