With markets nearing a breach of the February lows, a move which would officially mark the return of the secular bear market, we thought we would highlight some over-valued stocks which have broken down technically. As the bears continue to gain the upper hand over the remaining bulls in the near-term, the following four names seem particularly vulnerable to further downside from current levels.
With revenues decelerating and earnings growth on the wane, we feel that security firm Arcsight has seen its highs for this cycle. Trading for 3x sales and over 30X earnings, ARST appears to be over-valued, even after its recent move below its 200-day SMA. We have taken a probing short position in the name for the accounts we oversee. Earnings are due on June 11th. A close below $20.6 on a closing basis could result in a quick down-leg to the mid-teens.
Concur Technologies (NASDAQ:CNQR)
As markets bounced strongly into the close on Friday software maker Concur Technologies did not rally with the market. Instead, it finished below its 200-day SMA, a big sign of relative weakness that bears watching in the coming weeks.
Trading for over 6X sales and also for 50X 2010 estimates, CNQR is over-valued. Should the market break through the February lows, CNQR would have to be considered as an attractive short-sale candidate in a bear market. As such, we plan to add to our current short position in CNQR on any break through Friday’s lows.
BLUE NILE (NASDAQ:NILE)
Although online diamond and jewelry company Blue Nile has significant cash flow generation each quarter and could be a take-out candidate, its high P/E makes this stock particularly vulnerable in the current tape. Short interest is quite heavy in the name, with almost 4 million of the 14.5 million shares outstanding currently short. NILE trades for 42X 2010 numbers, yet is only expected to grow earnings 20% this year.
Technically, NILE looks like it is ready to fall off a cliff. Any move below $45 could prove fatal for the stock.
SOCIEDAD QUIMICA y MINERA S.A. (NYSE:SQM)
Sociedad Quimica y Minera S.A. is a weak stock in the extremely weak fertilizer space. The stock has recently broken to new 52-week lows after forming a very flat base over the past few years. SQM is currently trading for 25X 2010 earnings estimates and prospects for 2010 seem uncertain.
In our view, SQM could be headed for a nasty spill in the near-term: earnings are due on Tuesday. In its last earnings report, management offered mixed guidance for the upcoming year. Should management adopt a similar tone during its call today, this uncertainty could act as a lever for significant selling in the shares. In a tape that has taken down even the strongest of earnings reports, any hint of deteriorating fundamentals could prove to be deleterious for the company’s stock.
Disclosure: Short ARST stock in discretionary accounts; also, long puts on ARST, CNQR, NILE, SQM