With the S&P 500 still down 14% from its all-time high, bargain hunting remains a temptation for investors.

That’s especially true in corners of the market that have imploded.

For example, the small-cap growth stocks where former high-flyers continue struggling.

Wayfair (W) is a good example. The stock made an incredible run, gaining over 1,300% from the low in 2020 to its peak about a year later.

But ever since that top, the stock has since lost 89% of its value. And while bargain hunting may be tempting in the most beaten-down names like W, you should make sure you have an edge before jumping in.

After all, there might be a good reason why a stock is down that much.

So today, I want to show you another way I use my alpha rank… this time to spot the stocks you should stay away from.

Know Which Stocks to Avoid

Last week, I showed you how my alpha rank system uses a computer algorithm to quickly evaluate thousands of stocks across dozens of factors.

These factors are historically proven to point the way toward stocks that outperform.

And while these alpha factors historically show which stocks have the best potential for outsized returns, there’s more than one way to utilize the rankings.

They also shine the spotlight on which stocks to avoid… or even bet against.

That’s because the worst ranked stocks have delivered -10.8% in annualized returns since 2010.

Think about that for a moment… During a period characterized by a massive bull market, the bottom ranked stocks still lost nearly 80% of their value in total.

That proves companies showing things like poor profitability and quality are the ones to avoid.

And that brings me back to Wayfair, and why you should avoid the temptation of buying at these levels.

No Edge Here

This isn’t meant to be an attack on Wayfair’s stock. I’m simply highlighting data contained in the company’s financial statements and stock price that make up my ranking system.

Consider that earnings are expected to be in the red by $4.25 per share, while estimates for 2024 are being revised lower by Wall Street analysts over the past six months.

That’s dragging down profitability and analyst revision factors in the score. That’s why Wayfair scores a 4 (out of 100) in my model.

Now look at the chart setup, which goes back to June 2021.

As the stock plunged into 2022, you can see that a low was found back in October around the $29 level.

Ever since then, the stock has been trading sideways, testing that same $29 level multiple times (the dashed trendline).

And while it might be tempting to buy a stock that’s down 89% from the peak and potentially carving out a support level, I’m not dipping my toe in the water until the stock’s rank improves.

There’s also something else I would watch for…

Given the stock’s current score, I would consider adding puts on a breakdown through that $29 support level.

It’s easy to find stocks across the market that are down significantly from their highs.

But before you go off bargain hunting, check if an edge is there.

Best regards,

Clint Brewer

Are there any stocks you’d like to check for an edge? We’ll be doing a “bargain finds” series, where I’ll run a few stocks through my alpha rank and let you know if it’s an opportunity or not.

Make sure to write in the stocks you want to see at feedback@jeffclarktrader.com.