The stock market looks like a terrible place to park money right now given the collapse below the 200 day moving average, the loss in confidence in our regulatory bodies, the ineptitude in Washington, and the general overvalued nature of the markets at present. I don't view the dips as a buying opportunity just yet and the following 6 stocks could have a full 50% correction in store for them over the next few months. Each of these names is trading at a premium multiple and investors should avoid or short these stocks instead of following a "buy and hope" approach to investing in these "cult of equity" names.
(GMCR) -- Green Mountain Coffee Roasters has shown investors incredible returns over the past year, but accounting irregularities, an SEC investigation, and a potential saturation of their market make these shares look like a strong short at 110X earnings. The stock is a leader in the bull market and has risen some 300% over the past year which makes this name a good short candidate for a bear market -- just as Newton predicted that what goes up must come down in Physics, stocks that shoot straight up do not always reach the moon and often come crashing back down with a vengeance. GMCR's patents on the K Cup Brewer is set to expire soon and I expect Starbucks and Dunkin Donuts to begin manufacturing their own version of the Keurig Brewer once they are legally able to do so -- shorting GMCR is not for the faint of heart, but big profits can be made if the markets continue to sell off.
(CROX) -- CROX makes, well, less than attractive sandals in my opinion and the stock is trading at a less than attractive valuation as well. The name has had a great run from $1 to $28.50 or so over the last two years, but the recent reversal from the $31.50 level suggests the buyers are tired here and the stock could be set for a reversal all the way down to $20 or so in the next month or two. Investors looking to get aggressive here can buy the August $30 puts or can short the name directly using a tight stop loss at $29 or so per share. The overall markets appear to be in a strong downtrend right now, and as they say the trend is your friend.
(CRM) -- One of the most overvalued names I have ever followed in my opinion is Salesforce.com -- while "cloud computing" is all the rave on Wall Street, the computing craze has yet to take off on Main Street and CRM shares are trading in a bubble at present prices. If the 400 plus PE ratio is not enough to convince you, the chart pattern shows that the stock is clearly rolling over here and could really begin a bear market decline which eventually tests and possibly fails the $100 a share mark in the medium term. If the overall market continues to crash, it is almost a certainty that shorting CRM will outperform shorting an index fund given the stock's lack of earnings and meteoric rise in share price.
(AMZN) -- Amazon is another "cult of equity" name that trades over 100X earnings. The stock has long been prone to bubble runs and bubble bursts over the past fifteen years, and right now looks to be a good time to go short of the name given the fact that earnings are actually falling and that the company's guidance was quite weak for the rest of the year. Top line growth does not always translate to bottom line growth or stock price gains for internet stocks -- Amazon is overvalued in a big way when compared to Apple, and I view Apple as risky here as well. In other words, while Apple could fall some 30% if we embark on a 2008-like bear market for stocks, Amazon could fall at least 50% and still be fairly valued.
(CMG) -- Chipotle shares are expensive at 52X earnings and the company's year over year growth rate of just 9% does not justify such a rich valuation. If the company cannot deliver 20% bottom line growth over the next ten years, these shares could drop much lower than many investors believe. If for any reason the company actually sees a drop in earnings, these shares will get crushed and if we enter into a strong bear market CMG's "high beta" appeal will work in reverse and investors will lose more than the index funds on the way down just as their penchant for risk made them more than the index funds on the way up. In other words, I view a short on this "leader" as a good trade given present valuations and trends in the overall stock market.
(PEET) -- Peet's Coffee is a lot like GMCR yet it lacks the market growth and appeal of Green Mountain. While Peet's accounting is not in question, their growth rate and business model does not seem strong enough for a 45 PE ratio -- game changing technology stocks deserve 1999 multiples only on occasion, but coffee retailers should almost as a rule not deserve high multiples to earnings because their growth rates are subject to sudden and rapid change for the worse if a new competitor comes into play. I would not short PEET's at a 25X earnings multiple but at a price of $60 a share, this short play looks like a sure fire winner.
Disclosure: I am short GMCR, PEET, CMG, CROX, CRM, AMZN.