(By stones, I really mean balls)
For those of you not as far along in the investing terminology, shorting a stock is betting that the stock will go down in price. An investor borrowers the shares from their broker, and the shares are sold. Once the price of the shares goes down, the investor decides to cover their short, meaning they go back to the market and re-buy the shares they sold earlier. The spread between the sell price and the buy price is the profit.
There are risks involved in shorting a stock. If the share price goes up, an investor will lose money shorting. Since a stock can go up indefinitely, the theoretical loss potential from shorting can be much more than 100% of the initial investment. If the stock being shorted pays a dividend, the investor shorting the stock is responsible for paying that dividend to the shareholder they borrowed the shares from in the first place.
I typically don’t short stocks. One of my very first investments was shorting Air Canada all the way to bankruptcy back in about 2004. Since then though, I haven’t shorted a single stock. Maybe I’m an optimist, but I just don’t get excited about betting against a company. I’d rather try to find an undervalued gem than bet against an overvalued stock. Sometimes though, I get the itch to short a stock that is just so ridiculously overvalued. Luckily for me, I can just blog about my picks and save my capital for buying shares.
1. Netflix
I’ve wrote before about how I’m not really a long term fan of Netflix. I think the cost of their streaming service will only go up. I think there is no way they can maintain the subscriber growth the market has priced in for the stock. Their price earnings ratio is over 80. Their net margins are under 10%, meaning they don’t have a lot of room to stomach any sort of cost increases. Netflix hogs a whole bunch of bandwidth, meaning their success depends on the telecom operators and the internet service providers.
The company has a book value of $5.50, meaning the shares trade at more than 40 times the value of the company. That is ridiculously expensive, and you know the stock will get absolutely hammered with one earnings miss.
2. Amazon
The Thousandaire stock pick of the day yesterday is horribly expensive from every metric. The company recorded net margins of only 3.6% during the busiest quarter of their history. Everybody you know already buys stuff online, so how long can the company maintain double digit revenue growth? A price earnings ratio of 68 and a price to book ratio of almost 14. For the market to maintain these valuations requires Amazon beating the stuffing out of expectations quarter after quarter. They’ll stumble sooner or later.
3. Any Gold Company That Doesn’t Make Money
Gold is at a record high. If a gold company can’t make money at this point, what are they going to do once the price goes down?
If you do some research, you can easily find half a dozen.
4. Sprint Nextel
If the massive debt load isn’t reason enough for you to be pessimistic about this dog, the company hasn’t made money since 2006. A quick Google search shows that there are all sorts of people who hate Sprint more than I had attractive redheads who turn me down.
If the AT&T and T-Mobile merger goes through, Sprint becomes a distant third player in the tough U.S. wireless market. Almost half of Sprint’s book value is made up of intangible assets, assets a value investor doesn’t value very highly.
5. Sirius/XM
A massive debt load combined with the large number of outstanding shares makes this company ripe for a 10:1 share consolidation. Usually after a company consolidates shares, the stock trades downwards for a while after. Even though the satellite radios are built right into new cars, ipods make listening to commercial free music easy. It turns out the whole world agrees with me on this one, since it’s by far the most shorted stock on the Nasdaq.
Any stocks you hate readers? Do you want to short something into oblivion? Share it in the comments.
I agree with all your shor picks. IF I were to short these stocks (like you I don’t have the guts!) I would only want to do it when the market is also falling. Your timing may be perfect. I think the market is running out of gas.
I’ve thought the market is due for a good correction for months now. We had one with the Japan/Middle East stuff, but I still think there’s some more downside risk. However, I am just some idiot with a blog, so don’t go planning your portfolio on my predictions.
Any REIT…. as interest rates go up building valuations go down making it really hard to refinance to pay your fat unsustainable dividends. We all know what happens when dividends go down…
Yes, except I wouldn’t want to pay those distributions while I shorted it.
I bet there are some that have already cut their distributions and that are already weak. I’d go with those ones.
Netflix yesterday just announced that they now use 2/3 less data. Now watching 30 hours of video will only use 9 GB of data where before it used 31.
They made the change because they know of many Canadian internet data caps that have been put in place (boo). I think it’s great!
This probably doesn’t change your opinion of them but I thought I would share. I use Netflix and got the email yesterday from them saying this.
As for shorting stock, I don’t think I would ever have the balls to do it. I’d rather buy a company that is undervalued, like you said.
Of course you wouldn’t have the balls to do it. You don’t have balls
There’s all sorts of rumblings that U.S. ISPs are going to implement these data caps, and Netflix is testing the idea up here. It’s a pretty good idea. Have you watched the new Netflix yet? How does it look?
It still doesn’t change my mind, but it’s a positive move on their part, assuming the quality isn’t horrible.
I agree with Netflix and Amazon. I wouldn’t invest in Gold right now but there’s no way I would short it either, you just never know which way it will go.
My pick would be Lululemon. They’ve been beating expectations (handily) but I don’t think they can keep up this pace. The stock is at an all-time high and P/E is over 50.
Lululemon is a great pick. Even though the pants make girls’ asses look great, the stock is expensive. Clothing is so cyclical, it’s only a matter of time before something else becomes the new hot trend.
I’d watch what broad industry segments are doing. The rise of the internet brought the newspaper industry to its knees; how will Netflix handle the rise of instantly streaming movies and 3D projection? They seem to be embracing the technology … but can it be as profitable?
Agreed. If an investor finds a weak sector, shorting the weakest of the weak could prove profitable.
Such great picks! I definitely agree with you on Netflix and Amazon. I don’t know why Amazon has been doing so well/ is so expensive.
I also want to see Lululemon crash and burn- but their pants do make my butt look good. I just don’t agree with the ridiculously high P/E and how everyone gets all hyped up over it. Over the christmas season, they did ‘so well’ that they couldn’t keep up with stocking the shelves for the demand…
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Your forgot Sony but that would take some real thought to figure out why.
Oh, please, enlighten us with your groundbreaking analysis on Sony, oh knower of all things!
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Obviously, good call on Netflix. If any of us would have shorted it when you wrote this, we could have made some serious coin in the third quarter of last year.