Selling a stock short is controversial and is also a tough way to make money for the most part -- betting against a company that investors are enthusiastic about is never easy, but in a market that looks to be in a one-time stimulus created bubble, short selling overvalued pump-job growth names that Wall Street cheerleaders love may be the only way the common investor can hedge their portfolios against permanent capital loss.;
In my interview with business psychologist Iris McLister, we discussed short selling in detail.
"Many Americans feel that shorting is cynical, that the act of short-selling is synonymous with withdrawing support. I don’t think it’s an uncommon standpoint for Americans to have, right? As if short-sales are somehow un-patriotic, akin to going against some perceived civil duty. You're not a villain and you're not taking advantage because you are capitalizing on a system that is inherently flawed. You can’t exploit something that’s built on unsustainable tenets. I just can't find fault in your playing the system because the only thing you can do to profit is what you are doing. You are making sure the system is working for you. If you sat back and were idle and worrying about your loyalty to this country, you wouldn't be getting anywhere at all. It's not in our control right now."
What would you tell an investor who owned an overvalued stock?
"Sell! But ‘overvalued’ is a loaded word. You are going have people who disagree with you on how much a stock is worth. Of course, being wrong about the market is a tricky thing. Nobody wants to be wrong when it comes to their personal wealth. As soon as we recognize that any stock is subject to being ‘overvalued’ we can begin to let go of our reservations about that stock, right? You have to dive into this thing headfirst. Investing isn’t for the faint of heart. That being said, once you make a decision about the market, don’t beat yourself up about it if it doesn’t pan out."
How should a trader handle a loss?
"That's a tricky one. Nobody likes to lose, but again, the reality is that losing is unfortunately an inevitable aspect of investing in these jumpy markets. Maybe the trick has to do with knowing how to handle yourself, knowing how to treat yourself. Are you going to beat yourself up and do the 'coulda, shoulda, woulda' thing, or are you going to take a deep breath and learn from your mistakes, accepting the fact that some market lows are truly unforeseeable. Learn to be gentle with yourself. The amazing thing about what we have learned about this economy is that you have to be in a state of suspended animation. Limbo is not a feeling or a place that is natural for most of us! There’s a huge leap of faith involved. You can't afford to let yourself grieve a loss because you don't know what is going to happen on Monday morning."
I agree with her assessment and I believe that telling investors not to buy companies trading for insane valuations is a positive and can help prevent bubbles. The following eight names look fully to overvalued to us:
(NASDAQ:SINA) -- Chinese Internet company Sina looks overvalued to me with a 6 billion dollar valuation and little in the way of cash flow and earnings. We're not interested in finding the next big thing in investing, as that strategy usually winds up handing investors losses. Shorting the shattered dreams of tech savvy investors, however, makes much more financial sense when it appears speculators have fallen in love with a pump and we can short it before the dump. Sina's books suggest it falls into this category of investments ... Sina runs a popular website but so far popular has yet to translate into profit.
(NYSE:SPG) - Simon Property is fighting an uphill battle as the company owns a ton of mall real estate at a time when consumer confidence sits at a 30 year low. Just a couple of years ago, most people thought all of the local malls were going to go bankrupt and that they would eventually be turned into indoor farms because business was so bad. The REITS were sold off into oblivion. Today, SPG sits near an all time high... In my view, the fundamental headwinds still exist and this stock does not deserve to trade for 25-30X free cash flow, but more like 10-15X free cash flows, implying a drop of 50% for the common stock.
(NASDAQ:BIDU) -- Baidu is a great company but it operates in an opaque and challenging political environment. With the recent hand slapping of the company by the Chinese Government, we are even more skeptical than usual of this high valuation high flying growth name, though we would not short the name here. selling a bear call spread makes more sense than going long to us, however, as the name trades for an extremely lofty price to sales multiple.
(NYSE:LNKD) -- LinkedIn is worth a lot of money, it's just sadly not worth anywhere near 9 billion dollars and that's why Hedgephone rates LNKD a strong long term short here at $81.60 a share. We suggest selling longer dated call options versus shorting the shares directly and would add slowly and on strength to this "business model" bubble play.
(NASDAQ:TST) -- TheStreet.com stock has fallen some 90% over the past seven years, leaving longer term investors pretty much charred to well done. The balance sheet shows $62MM in tangible asset value which we view as a level of support for the near term for TST shares hence the skeptical view. If the cash burn continues at current rates, that 62mm may evaporate sooner rather than later. As for earnings, the past is not indicative of future results, but it's all that analysts have to go by -- under these circumstances, TST investors should keep a watchful eye on earnings releases going forward. We do respect TST 's core business model. However, in bear markets, today's valuations trump expectations for future growth. We would only be comfortable here with a substantial discount to tangible book value given the company's longer term tendency to book losses on the bottom line.
(NASDAQ:DNKN) -- Dunkin Donuts may fuel Americans need for Caffeine but America should run on the doughnuts and not on the common stock. The reason we rate DNKN a sell here is that Dunkin is trading for close to 40X earnings and it sells a commodity product in many ways. The coffee is tasty, but the stock is too expensive to actually make long term investors much, if any, actual money over the longer term.
(NYSE:P) -- While I admire Pandora's disruptive model, the stock is looking a bit expensive and reminds us of the heady late 1990's with its Internet enthusiasm fueling the hefty valuation for the shares. Sure, maybe there are some greater fools out there to take the longs out at higher prices, but any return to a bear market for the overall indexes should hurt P longs and help P shorts.
(NYSE:CMG) -- Want to know why Chipotle Mexican Grill stock is heading lower? Because it's materially overvalued in the stock market right now. The shares should be trading for around $200 given the company's recent showing of 10% per annum net income growth. Maybe you can find some guy with big red shoes to tell you otherwise, but we view this as a hype play which could make short sellers some money going forward.
Disclosure: I am short CMG, LNKD, SPG. I am long put spreads on sina and dnkn and short a call spread on BIDU. Most of my shorts including these names are placed via options positions to lower risk and to earn premium.