The Most-Hated Stock In America

The Most-Hated Stock In America

Friday, August 1, 2008

A news headline ran across my screen today that fingered Fannie Mae as the most-hated stock in America. Losing 90% of your shareholders' equity will tend to create some ill will, but "most-hated stock" is a pretty harsh label.

It might be instructive to see if there's a way to look at sentiment data to find the stocks that are truly the most-hated in America. To do so, let's look at the universe of stocks in the Russell 3000 index that show the highest levels of pessimism.

To define "pessimism", let's require that the stock have:

1. A Short Interest Ratio that is in the top 10% of all stocks (showing a huge amount of bets the stock will fall relative to its average trading volume).

2. A consensus analyst rating that is in the lowest 10% of all stocks (showing that Wall Street has given up on the stock). At least three analysts have to cover the stock in order for us to consider it. The ratings go from 1 (strong sell) to 5 (strong buy).

3. Has put option open interest relative to call option open interest that is in the top half of all stocks (showing that traders are heavily invested in put options - bets the stock will fall).

When we run that screen against the Russell 3000, only a handful of stocks make up the list of those that are truly despised. Oddly enough, FNM didn't qualify, although the Financial and Consumer Cyclical sectors were well-represented.

The table below shows the ratios we used to determine most-hated status, along with a "hate" score that combines all three of them. The table is ranked so that the most-hated of the most-hated is on top. Media General took the honors.

The average year-to-date return in the stocks is -36%, well below the S&P 500, so it's no wonder these stocks have fallen out of favor.

We can do the opposite, and look for the most-loved stocks, by reversing the criteria above. Here, we'll search for any stock that has a Short Interest Ratio in the bottom 10% of all stocks, has a consensus analyst rating in the top 10%, and has a put/call open interest ratio in the bottom half of all stocks.

Here they are:

A mish-mash of sectors were represented, but in general they have held up well this year with an average return of just -0.5%. So it makes some sense that investors have not placed too many bets against these performers.

Typical contrary analysis would tell us to buy the hated stocks and sell the loved ones. After all, if the hated stocks have already fallen so much, and have so many bets against them recovering, then they probably have less of a hurdle to overcome to achieve a positive surprise.

We'll look back at a later date and see which ones came out on top.