Dr. Doom: Ignore the Happy Headlines, There Are Dark Days Ahead

(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA. Short data sourced from Yahoo! Finance.)

Nouriel Roubini, the man who correctly predicted the 2008 financial crisis, has no doubt in his mind a double-dip recession is coming, regardless of how the euro zone sovereign debt crisis plays out.

Roubini (pictured left), an economist widely known as Dr. Doom, is a man who seems to have a negative outlook even at the best of times. But this noted economist doesn’t feel he is overplaying his doomsday prediction. In fact he has become more convinced of it.

“In my view, there’s a significant probability – more than 50 per cent – that over the next 12 months, there’s going to be another recession in most advanced economies,” he stated in a speech at a CHOGM Commonwealth Business Forum. “If we look at the situation in the United States, in the Eurozone and in the United Kingdom, the chances of another recession are significant.”

To start, he predicts a hard landing in China. He says the country has over-invested itself to the extent that investments now make up almost 50% of the national GDP. He says this practice is largely unsustainable and has led to downfalls in the past. The country plans to slow its growth but if it takes hit from this angle, it will crash well beyond its target GDP growth rate.

Roubini predicts China’s massive growth will stall by 2013-14. Due to China’s significant role in the global market the effects would be devastating for the international economies, including the United States.

Secondly, Roubini wants it to be known that the European sovereign debt crisis is far from fixed, and the ability of the EU to correct its problems only matters in degrees. “If we’re asking ourselves whether the recession in advanced economies is going to be mild or whether it will be severe, the answer very much depends on what happens in the Eurozone… If the Eurozone is able to control its own crisis, the recession will be relatively mild. “

Roubini remains pessimistic on the outlook for the economy, but do others share his bearish sentiment? And more importantly, are there any specific examples of stocks being dragged down by this extreme pessimism?

For ideas, we identified the worst performing S&P 500 stocks over the last year. To refine the list, we collected data on short trends, and identified the names that have seen a significant rise in shares shorted over the last month (i.e. short sellers think there’s more downside to these names).

Are these stocks being dragged down by extreme pessimism? If you’re a contrarian, or if you disagree with Roubini, this list might offer some interesting contrarian ideas.

analyse These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. visualise annual returns for all stocks mentioned

List sorted by performance.

1. First Solar, Inc. (FSLR): First Solar, Inc. manufactures and sells solar modules using a thin-film semiconductor technology. The stock has returned -60.62% over the last year. Shares shorted have increased from 18.85M to 20.34M over the last month, an increase which represents about 2.51% of the company’s float of 59.47M shares.

2. United States Steel Corp. (X): Produces and sells steel mill products in North America and Central Europe. The stock has returned -41.14% over the last year. Shares shorted have increased from 26.18M to 31.26M over the last month, an increase which represents about 3.55% of the company’s float of 143.21M shares.

3. Scripps Networks Interactive, Inc. (SNI): Operates as a lifestyle content and Internet search company in the United States and internationally. The stock has returned -10.32% over the last year. Shares shorted have increased from 4.09M to 5.24M over the last month, an increase which represents about 2.11% of the company’s float of 54.50M shares.

4. Cliffs Natural Resources Inc. (CLF): Produces iron ore pellets, lump and fines iron ore, and metallurgical coal products. The stock has returned -1.64% over the last year. Shares shorted have increased from 5.08M to 6.67M over the last month, an increase which represents about 1.1% of the company’s float of 145.11M shares.

5. Sears Holdings Corporation (SHLD): Operates as a retailer in the United States and Canada. The stock has returned -1.10% over the last year. Shares shorted have increased from 11.55M to 12.01M over the last month, an increase which represents about 1.24% of the company’s float of 37.24M shares.

Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


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