Shorting LinkedIn? Are You Crazy?

May.31.11 | About: LinkedIn (LNKD)

After the incredible rally of LinkedIn (NYSE:LNKD) in the hours and days following its IPO, many -- including me -- questioned the valuations used for the company to trade even close to where it currently is. By almost any measure, LinkedIn is vastly overbought, and while Facebook has not yet turned public, several other stocks could easily be bought instead. So what would someone like me, a long and short technology stock trader, do in such a time? If you guessed that I would short LNKD, you would be dead wrong.

I was surprised to read a Wall Street Journal piece regarding the expensive cost for borrowers of LinkedIn.The cause, of course, is the huge demand by short sellers. I can easily imagine that many are thinking about shorting the stock. But to find out that so many are doing it? It just seems like such a risky move.

Last year, I discussed Research In Motion’s (RIMM) fall and how trying to buy the stock was similar to catching a falling knife. It might work. But trying to time these things is incredibly difficult and risky. There are so many less obvious but also less risky trades out there; why would you want to try to pull off the miracle timing?

Don’t get me wrong, it is very tempting. I did make that same mistake last year when I shorted the red hot Baidu (NASDAQ:BIDU), which had incredible momentum. It’s just so attractive to see a stock that seems massively overvalued or undervalued.

The problem, of course, is that these things tend to go on further and for longer than anyone could expect. Stocks like Netflix (NASDAQ:NFLX) and OpenTable (NASDAQ:OPEN) have been shorted massively in recent months without success. Those who considered the stocks overvalued still do to this day ... but most have been forced to close out their position.

What to Do?

I think the most important thing is to stay out until things calm down. I very well could end up shorting LinkedIn, but it probably will not happen in the next few weeks -- and I will probably wait for technicals to be less strong. Using trend analysis is certainly one way to get this analysis done.