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By Lee Jackson

One of the biggest complaints for years about Wall Street research was that firms rarely said when and what to sell. Back in the halcyon days of the late 1980s and through the 1990s, many stock analysts were very cozy with the companies they covered and the "Chinese Wall" between banking and research was often very thin or nonexistent. Those days, and many of those people, are long gone.

Most larger Wall Street firms have their lists of top stocks to buy. Investors are often interested to see not only the top stocks recommended to buy, but how the lists have changed. For example, UBS's (UBS) second-quarter report of top picks includes the stocks in which the firm sees a 25% upside.

But UBS also included in its report a list of its "least preferred" stocks. Those are the stocks the firm's analysts estimate have an average potential downside of 20%.

We screened the list for the stocks with the largest downside potential on a percentage basis. This list may provide investors with a rogues gallery of names to sell short, take profits in, or to just get out of. The following are the "least preferred" stocks at UBS.

Struggling retailer J.C. Penney (JCP) makes the list. Run by former Apple (AAPL) retail guru Ron Johnson, this iconic American retailer has suffered from a constant change of marketing and advertising strategies -- none of which has worked. The UBS target price is $10. The Thomson/First Call estimate is $15. Potential downside to the target is 32.8%.

With low margins and growing competition from discount retailers, supermarket chain Safeway (SWY) goes in the shopping cart of stocks to sell. The UBS estimate for Safeway is $19. The Wall Street consensus estimate is $24. Potential downside to the target is 27.9%.


RadioShack (RSH) joins the struggling retailers club. From an outdated name to a horribly competitive niche of retailing, this once successful franchise may be headed for the stock graveyard. The UBS price target is $2. The consensus estimate is close at $2.50. Potential downside to the target is 40.5%.

Integrated oil and gas giant ConocoPhillips (COP) is a large cap name that makes the list. America's third largest oil company spun off its refining, pipelines and chemical divisions a year ago. Some think that was a mistake. The UBS target for the stock is $50. The consensus estimate is $63. ConocoPhillips pays a 4.40% dividend. Potential downside to target is 17.2%.

Small cap biotech company Ironwood Pharmaceuticals (IRWD) may have the proverbial bull's-eye on its back. With limited revenues and high cash burn, this stock already has almost 25% of the float sold short. The UBS price objective is $11.50. The consensus estimate is $18. Potential downside to the target is 37%.

Home builder Meritage Homes (MTH) may have moved a little ahead of itself. While UBS likes its position in the marketplace, the company feels that the earnings simply do not justify the stock price. The UBS price target is $25 and the consensus estimate is $47.75. With a potential downside to the target of 47%, this is a very contrarian call.

Paper and packaging giant Louisiana-Pacific (LPX) makes the least preferred list. Trading near a 52-week high and also riding the home building boom, the stock is another "fully valued" candidate. The UBS target is $15. The consensus estimate is $21. Potential downside to the target is right at 30%.

Rounding out the list of stocks to sell is railroad transport Kansas City Southern (KSU). It is trading at 26 times earnings, and the UBS team thinks that is an extremely high multiple to pay for a railroad. The exposure to a very volatile Mexico is also a concern. The UBS price target for the stock is $83. The consensus is also below the current price at $98.50. The potential downside to the target is 23%.

Selling stocks short can be very risky, but also very rewarding. UBS might just be telling its clients that more weakness is ahead in these names. We also want to remind investors that short sellers are responsible to pay the dividend or the distribution of the stocks they sell short if that dividend is paid during the time they short the stock.

The old short selling adage of "stocks often go up like an escalator and down like an elevator" is usually spot on. Especially if you pick the right entry point.


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