The Real Story: Kellogg Shares Not Popping

"Sell in May and go away" is a well-known and well-heeded Wall Street axiom. Starting in 1950, if you invested in the Dow Jones Industrials every year on May 1 and sold on Oct. 31, you'd actually have a loss, according to the Stock Trader's Almanac.

As we approach a historically difficult time for the market, it's an opportune moment to search for stocks that are better off being sold than bought.

I took a quantitative approach to start the research for some new ideas, thereby eliminating any of my own biases. Using Morningstar's premium stock screen, I started with stocks that had at least a $300 million market cap.

From there I wanted to see companies that had positive net income growth with declining cash flow from operations. Earnings can be doctored much more easily than cash flow, and that combination can be an early warning sign that net income growth will deteriorate or turn negative.

Other areas I screened for:

• Lower inventory turnover: Companies that are turning over their inventory at lower rates are not optimizing their capital, as it is tied up in product that is sitting on the shelves.
• Higher days sales outstanding: DSOs are a measure of account receivables. Higher DSOs show that a company is not converting its sales to cash in an optimal manner. It can also be an indicator that a company is stuffing the channel if it rises disproportionately to sales.

I also looked for companies with shrinking gross profit margins and price-earnings-to-growth ratios that were higher than the sector average.

My screener spit out the following eight stocks, which are shown here along with how many analysts rate each security a buy, sell or hold.

Non-Elite Eight Of stocks with negative early warning signs, only Kellogg is loved by analysts
Company	Ticker	Business	Buys	Holds	Sells
Imation	IMN	Data storage	2	1	0
Kellogg	K	Packaged foods	16	6	0
Nicor	GAS	Nat. gas	1	4	0
Northwest Nat. Gas	NWN	Nat. gas	3	3	1
PepsiAmericas	PAS	Beverages	1	6	3
Regal Cinemas	RGC	Movie theaters	6	4	1
Sunoco Logistics Partners	SXL	Oil	3	7	0
UST	UST	Tobacco	1	3	4
Source: Morningstar, Thomson

As you can see, of the eight, only Kellogg (K Quote) has a strong bullish bias. Being a self-proclaimed contrarian, I'm particularly wary of stocks the rest of the Street is still positive on. If most of Wall Street hates a stock that is a short candidate, chances are that much of the downside has already been realized.

So let's take a closer look at Kellogg, which was recently down 0.8% to $43.44 after a downgrade by Goldman Sachs. The stock has downside risk to $40, in my opinion, on the basis of both technical and fundamental factors.