Shorting Lousy Stocks = Lousy Returns?

Even the worst stocks have their time in the limelight

March 2023. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Shorting stocks with poor features was unattractive throughout most of the last decade
  • Combining features would not have improved performance
  • It only started working again in 2022


Playing the stock market should be easy. When the economy is booming, buy equities. When it’s deteriorating, short them.

Stock selection shouldn’t take much effort either — we just need to apply the metrics from the factor investing literature. In bull markets that might mean focusing on cheap, low-risk, outperforming, small, or high-quality stocks, and in bear markets, the inverse.

Of course, in practice, equity investing is neither easy nor effortless.

First, not even economists can really pinpoint when an economy goes from boom to bust. Economic data isn’t released in real time and is often revised. It may take quarters if not years to determine precisely when the tide turned. Second, in the recent, long-running bull market, buying stocks with high factor loadings has not been a winning formula. For example, the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) — the largest multi-factor product, with almost $11 billion in assets under management (AUM) — has underperformed the S&P 500 by 10% since its launch in September 2015 (read Multi-Factor Smart Beta ETFs).

But what about shorting stocks? How has that worked as a strategy? Let’s explore.


To identify what stocks to short, we focused on five factors: value, quality, momentum, low-volatility, and growth. The first four of these are supported by academic research, and while the growth factor is not, we included it in our analysis given its popularity among investors (read What Are Growth Stocks?).

We created five indices composed of the top 10% of the most expensive, low-quality, low-momentum, high-volatility, and low-growth stocks in the S&P 500 and shorted them. To isolate any excess returns from this strateg