Periodically we update readers on Goldman's conviction buy/sell list. Following up on our observations from yesterday in which the market melt-up is now taken for granted, we highlight the latest universe of 69 companies which comprise the most updated Goldman conviction list, of which 54 are buys and 20%, or 14, are sells. The empirical evidence seems to suggest that shorting the Buys and buying the Sells tends to generate the highest alpha over the next 6-12 months.
An interesting corollary. Following up on reader requests to correlate the Worst of the Worst list (or affectionately known as the Companies Ready and Able to Pounce, or CRAP, list) with Goldman ratings we observe that of the 40 companies with the highest short interest and worst YTD stock performance, only 6 have a Goldman ratin, of which 5 are rated "Neutral" and just one is a Buy.The Neutrals are Palm, Great Atlantic and Pacific, Athenahealth, 3Par, and Dole Food, with the sole Buy reserved for SolarWinds.
This brings up some interesting questions. Is the lack of Goldman coverage a major downside performance drift factor to companies (a great pitch point for Goldman when negotiating concessions out of companies in exchange for coverage)? Without even the possibility of a Goldman upgrade in the picture, accounts seem to not care about owning the vast majority of the CRAP names which don't have a short squeeze catalyst. Alternatively, Goldman may just not be able to afford enough sell-side analysts to cover every company in the world (unlikely). Or, more possibly, even Goldman has given up on these names, not even bothering to cover the majority (or 85% of the 40) of them. Alternatively, should Goldman decide to initiative coverage on any of these names (a Buy rating comes to mind, after all Goldman needs to curry favor with assorted management teams just so it can have hedge funds meeting with the CFO and getting all sorts of "perfectly public" information), these stocks will explode to the upside. The chart of existing Goldman coverage of the 40 CRaP names is below. Lastly, investors should pay careful attention to the 5 Neutral names, as the likelihood of an upgrade compared to a downgrade is much higher, and with an average 32.7% Short Interest as a % of Float, the short squeeze destruction that will ensue following a Goldman upgrade in one or many of these companies will be a sight to behold.
Zero Hedge will create a CRAP index to track the performance of these companies relative to the S&P 500. If the market is truly as busted as many think it is, this list should easily outperform the market over the next 6 months.