5 Short Ideas for Hedging Risk

Includes: CRM, DDS, IWF, IWM, NFLX
by: Hedgephone

After extensive research I feel as though the stock market is likely going to crumble here. I am worried about valuations, macro economic data, moral hazard, too big to fail, the Quadrillions of off balance sheet derivatives, and the loss of law and order in the financial market -- just look at the Chinese fraud rush for an example of this trend.

Here are five short ideas for hedging your risk:

IWF: The Russell 2000 Growth Index has only seen revenue growth of 4.8% YOY and I think that given that the fund carries a PE ratio over 18X earnings and a price to book value ratio of 3.5X, this index is ready to tank. At a price of $58 (at the time of writing), I would be looking for at least 20-30% downside to hit some reasonable estimate of intrinsic value. I respect that our central bankers want to spur growth, but blowing stock bubbles doesn't accomplish anything besides getting suckers to buy stocks at unreasonably high multiples and pushing gold and silver to new highs.

Netflix (NASDAQ:NFLX): Sorry Netflix bulls, the stock is just too expensive for my taste. The entire home entertainment market generates around $16 billion per year, and NFLX is already worth $14 billion and trading for 70X earnings. Cash flows here are also disconcerting, with payables and short term liability increases fueling operating cash flows. Book value is negligible here, so any hiccup and this company could actually be in some financial trouble in my view.

Salesforce.com (NYSE:CRM): Still a very expensive name at 400X earnings, as cash flow here is fueled from short term borrowing and not earning money. Too much excitement from retail has caused CRM stock to trade in a speculative bubble, detached from any reasonable metric of fundamental valuation. I will be looking to get short this name for size as the overall market begins to break down below the 200 day moving averages.

Dillards (NYSE:DDS): This stock is up from $4 to $50 in a few short years, Dillards just doesn't seem like a sure bet to me at these prices, but I would still recommend setting a tight stop loss order if you are going short the name. The decision to turn part of the stock into a REIT is great for investors, but i wish they would have done this at the lows of 2008 instead of becoming insular and cold to outside shareholders in the downturn and letting the stock crater. Things worked out quite well for longer term investors, but when another crisis hits this stock feels like one of the best short candidates around -- without jobs it's hard for the public to buy nice clothing.

IWM: When shorting stocks against a long book, many times finding a correlated index fund works better than trying to stock pick in reverse. The IWM is overvalued here and the run from the lows is nothing short of astonishing. Look at the 200 day moving average to decide whether or not to hedge your holdings against this index fund. The IWM is overvalued at 30X earnings and 3X book value.

Disclosure: I am short IWM, NFLX, CRM, DDS.