Is this the time to finally get short on stocks? QE3 is not coming, and stocks have largely skyrocketed due to the actions of the Federal Reserve. Like any drug addiction, the hangover is usually steeper and faster (as well as longer lasting) than the short term chemical high. QE2 may have a similar consequence for investors.
We recently upped our strong sell rating on the Russell 2000 to a strong short rating. Here are 15 stocks and ETFs that we rank as top short sale candidates and why these investments were handpicked out of a universe of 8,000 investments as investment dogs for the foreseeable future. Remember, we are value investors, and if any of these targets become cheap either through earnings growth or stock price declines we are nimble enough to change our minds and become neutral on these names in the future.
Rediff.com (REDF) - Rediff.com is a company that has lost money for many years, has declining page views, and is not earning money but is valued at over $300MM. Although they have a wide following and many page views, Rediff.comm has not been able to monetize its industry leading position as an Indian Website. REDF recently made a high around $17 per share, only to fall back down to a pre run-up level at $12.70 per share.
OpenTable (OPEN) - OpenTable has now surpassed even the most overvalued bubble-like mania that gripped Wall Street back in 2000. Short sellers can now safely trade against the retail herd in the stock and short the name with little concern regarding a short squeeze. The squeeze is already over and the weak shorts have likely covered the name, which is trading for a whopping 26 times revenues and 190 times earnings. Such a valuation is not warranted for this company and even if online restaurant reservation help is the next Google (GOOG), this stock has priced in far too much growth to be reasonable at current prices. This company would have to start streaming video rentals, selling e books, dominate search, and sell cloud software to justify the run-up in share price.
Salesforce.com (CRM) - Salesforce.com has had an incredible run, rising from just over $20 per share in 2009 to $140 per share just a couple of weeks ago. The trouble with CRM is that the PE ratio of 300X is simply not warranted by the company's earnings growth. Companies are slowly figuring out that its data is simply not secure enough on the cloud to justify the lower price points. Additionally, CRM cloud software is a lower margin business than software, which is why growth has been incredible over the past few years. Microsoft's (MSFT) entry and offer to CRM customers is another headwind for this company. Short sellers should watch the overall market to make sure they are not fighting the tape, however, if the markets begin to top out because of the end of QE, look to buy puts or sell calls (or both) on Salesforce.com.
SuccessFactors (SFSF) - SuccessFactors has proven to be very successful at one thing: selling investors on its common stock and increasing its top line. The bottom line, however, is a totally different story. SFSF was hurt recently on weak earnings and because they are forced to acquire businesses to continue their growth - this should remind investors of the tech bubble when companies used all stock deals to boost their top line growth right before the Nasdaq dropped some 80% from the highs during that mania.
Direxion Russell 2000 Bullish 3X (TNA) - If you are like me and feel the Russell 2000 is 50%-70% overvalued, the triple levered version of the Russell is a great place to have some short exposure. IWM recently failed to make new highs along with the Dow and S&P and if this smaller, more speculative index is going to lead on the way down this may be one of the best short sale candidates available for hedging market risk on your long book.
Direxion Technology Bull 3X (TYH) - Like TNA, TYH is the triple levered Russell 1000 technology index fund which is chalked full of frothier names like Riverbed Technology (RVBD) and many others. If this is truly a bubble for "new" tech stocks as I believe it is, TYH should make a great short.
Boston Properties (BXP) - Boston Properties recently broke out to new highs, but I view this as an exhaustion gap or blow-off top that is likely to be followed by a longer term secular bear market for the stock. Yes, real estate may bottom eventually, but prices have not stabilized yet all the while BXP is back to 2007 levels and looks downright overvalued to me. Buying an in-the-money put option seems to be a good way to hedge risks on other stock.
Simon Property Group (SPG) - Like BXP, Simon Property Group is overvalued, overbought and looks ripe for a well timed short position. This mall owner is trading at around 30X free cash flow and the retail sector seems a bit more risky than the overall market. The S&P 500 in comparison is trading for 15X earnings and likely for around 13X forward free cash flows and is not leveraged into mall cash flow streams which are indeed quite risky given the recession that the U.S. consumer is struggling with.
Travelzoo (TZOO) - Travelzoo has made what appears to be a double top with its 2004 highs over $100 per share. The stock has sold off considerably since then, but now that the formation is in, short sellers may be able to make an additional 20%-50% return "shorting and holding" this overvalued looking stock which still trades for around 80 times earnings.
Sify Technologies (SIFY) - Sify Technologies trades for a stomach churning 810 trailing 12-month earnings, yet the stock has shot up from $2 to $6 per share in just a few months. The stock made a high above $8 recently, but now looks ready to crack. As I speak the stock is down 15% on the day but looks vulnerable to a full circle retreat to $2 per share where the stock traded before the pump and dump type stock action began.
Retail HOLDRs (RTH) - The Retail Holders Trust has enjoyed a tremendous run, but the fundamentals for the retail business may be worse than the market currently believes. Selling a call option against this heavily shorted index fund appears to be a wise investment to hedge existing longs or for a more speculative bet on a coming bear market for retail stocks.
Dillards (DDS) - Dillards has a dual class share system and an extremely volatile, consumer dependent business. If the credit market slows again, or if consumers are forced to stay home due to higher gas prices, Dillards could face a sharp correction after shares surged since the 2009 lows. Investors looking to play options on DDS should consider selling at the money call options against this stock.
Delta (DAL) - Delta is suffering from a contraction in economic activity - GDP growth of 1.8% does not cut it when we have thrown the kitchen sink at the economy stimulus wise and have now run out of bullets. Delta is also vulnerable to higher oil and gas costs and the company's highly leveraged balance sheet, which has a tangible equity deficit, offers zero margin of safety for investors. Selling at the money call options seems to be a good way to play this name at current levels.
Baidu (BIDU) - Baidu's tremendous run looks to be nearing a top in my opinion, as the company commands an unheard of 40X revenue valuation that appears to me to be unsustainable. Investors can consider buying front month slightly in the money put options to play a bear market in this stock and in the overall markets in general.
Chipotle (CMG) - I love the food at Chipotle, but I cannot stand the lofty valuation which is why I think investors can make money selling at the money call options against Chipotle common stock. The large option premiums provide a nice cushion for investors that would pay $8 for a burrito but don't want to pay 45X earnings for the pricey stock.
All in all, this may finally be the time that market participants price in the end of Quantitative Easing and begin to unload their positions in stocks. The crowded trade that is the U.S. stock market could see a swift sell off as investors realize that a little money printing does not benefit all asset classes equally, i.e. commodities rise due to money supply increases, but stocks face headwinds from this as inflation impacts margins and the bottom line. This very well may be the first time in a year that it makes sense to hedge some, or all of your portfolio against the risk of a swift bear market decline in equities.