9 Tactical Short Positions to Bet Against

by: Hedgephone

With the after hours action in Netflix (NASDAQ:NFLX) looking quite weak and the reaction of the QQQ also weak, the time may finally be nearing to lighten up on stocks and bonds and hold some cash for a change. The QE Inflationary expectation bandwagon is coming to an end in just about a month. Traders who don't want to be caught with their pants down in momentum-investing-land should consider taking out some short positions to hedge their market risk. Additionally, the following seven short sale candidates look sensible from an absolute return perspective. History is now on the side of the short sellers given the chart patterns and valuations of the following five businesses. I am all for the internet revolution and that's why I write for Seeking Alpha, but in the end companies that move from $8 to $100 in less than a year can often trade back at $70 without the world coming to an end.

Look, this internet bubble is a lot like the last internet bubble... I am not saying that the internet is not a high growth area to invest in, but I am saying that it makes no sense to pay 100X earnings for such a business, let alone 200X earnings. High short interest is not as "contrarian" as many think, and once an overall correction in equity markets takes place there is really no question that investors will sell as quickly as possible many of the stocks that trade for the most outrageous valuations.

Put it this way, this article will likely generate $100 in profits for me if I am correct in my estimation of how many page views such a controversial post will receive. My page view growth rate for my little internet lemonade stand is quite robust, so that hundred dollar in earnings is worth $10,000??? So, put it more succinctly, if my articles can generate $50,000 from my "Social Media Investment Business" my net worth as a going concern would be $6,400,000 at a 128X earnings multiple!

So to conclude, Travelzoo (NASDAQ:TZOO) trading at 128X earnings is a lot like me being worth $6,400,000 for my Seeking Alpha posts. (And BTW, I have to really step up my game to hit 5MM page views this year, but anything is possible with hard work!) Maybe I should take myself public and call myself a "Group Buying" internet website company. I could call it "NSL.com" and be an instant $6.4MM richer!

OPEN -- Opentable is probably the most overvalued company I have seen in the past ten years of full time investing. I love the business, and I believe in the company fundamentals, however at 190X earnings, the stock is a strong short sell candidate. If Cramer keeps pumping it, who knows what can happen? After all, he did get Crocs (NASDAQ:CROX) to $60 and Energy Conversion Devices (NASDAQ:ENER) to $80 before they blew up. However, at this point, OPEN is far more overvalued than either CROX or ENER at their respective valuation peaks.

TZOO -- Travelzoo.com is now close to reaching $106 per share, which was the closing high it hit in 2004 before plummeting to under $10 per share in 2009. The stock at 128X earnings looks like a terrible investment-- and I am not really all that bearish on the overall markets until QE is ended in full. A wise strategy would be to sell short TZOO at $101-105 and to put a stop loss in at $106.50 just in case they can pump it to new all time highs.

CMG -- Chipotle is a great company at a nosebleed valuation. The stock has sold off in recent weeks but to be sure, this stock has appeared overvalued for a full year. Investors wishing to short this should consider selling a June $300 call option and buying a June $340 call option as a hedge.

LULU -- Lululemon is another Momo darling that is currently held as a short position for Whitney Tilson's T2 partners. The stock is expensive for a retailer at 60X earnings. If this trend turns into a has-been fad, the stock could truly fall apart. Investors looking to short the name should consider a bear call spread similar to what I discussed on CMG common.

AMZN -- Amazon is trading for a lofty 72X earnings. The company is struggling a bit with the slowdown in packaged media, which was once its go-to product category. Amazon faces the risk that state governments will appeal a Supreme Court ruling that internet companies don't have to pay state sales taxes, providing online retailers with a huge subsidy. Investors looking to short AMZN should either wait a bit for higher prices by selling a call option, or should sell a bear call spread to hedge the risk that the bubble is only going to inflate in a post QE market.

CRM -- Salesforce.com got a nice bump on VMWare's (NYSE:VMW) earnings, but investors should understand that VMW trades for around 38X forward earnings while CRM was trading at 100X forward earnings. And that was before the recent 10% ramp-job. Selling a June $145 call option seems to be a good trade for a quick profit on CRM's lofty valuation.

QPSA -- Que Pasa is a favorite short play of a well known short selling expert who will go unnamed at present. But the research this investor has done shows that QPSA was "pumped" by a well known paid-for research firm, which should raise red flags for investors. This company seems like a reasonable shorter term short sale play.

IWM -- Could the endless bid finally end for the Russell 2000? Trading at 27X earnings, the small cap index fund appears to this humble trader/blogger to be a horrible value at current prices. Investors looking to hedge their risks and hold long positions through thick and thin may want to buy longer dated in the money put options on the IWM.

GMCR -- Green Mountain Coffee makes a great cup of Joe but a terrible long term investment for the average joe at over 120X earnings. If you think this article is worth $10,000 then GMCR may be a good deal at $65. I don't want to sell myself short, but I do want to take out a small longer term short position on Green Mountain Coffee.

Disclosure: I am short GMCR, LULU, CRM, OPEN, CMG, IWM, AMZN.