Over the past month or so, investors have badly punished many of the leading names in the market and have preferred sticking with beaten up names that look undervalued. While I am a value investor by nurture, the nature of today's environment makes for some interesting outcomes for deep value, bottoms up Ben Graham investors these days.
I do believe the time will come for investors to scoop up a basket of 20-30 "cigar butt" stocks trading below net current assets, but right now may be a bit early for such a bottom fishing approach. In the meantime, I think the market has a little bit of downside left in it and that short selling the most "fully valued" equities that look vulnerable to a crash makes a good deal of sense on a shorter term trade basis.
Such a strategy worked well for shorts in TZOO, OPEN, CROX, NFLX, I think there are still many momentum driven names that have significant downside potential. That said, I am not smart enough to short sell or buy for size the financials or the banking stocks so I am not involved there in my writings or trading.
Here are 7 investments that look more interesting from the short side currently:
Houston USA Petroleum (HUSA) (which is mainly a South American petroleum business) is back from the dead, rising from around $10 back to $19.40 in a short period of time. The chart has once again gone parabolic, moving up about $1 per day on fairly low volume. In our view, the company is worth a good deal, but not $650 million with a long history of net losses.
I would look to sell out of the money calls versus directly shorting the name as a way to dollar cost average into any bearish bet on this high flyer, the stock was trading for under $1 a few years back so congratulations to the longs. I am merely looking at the valuation on earnings, which are coming from asset sales more than core business operations, and on asset value and scratching my head here. While it's not easy to value, I think the stock could come in quite a bit from these levels.
Green Mountain Coffee Roasters (GMCR) is a battle ground name with a caffeinated base of traders and momentum investors who can be found ripping each others throats out on the Yahoo message boards. GMCR is either the fastest growing business and best idea since sliced bread as far as investors are concerned or it is a complete and total ponzi scam that could burst at any time.
I come in somewhere in the middle -- I view GMCR as a speculative high P/E stock in a market that is aggressively paring down risk. Therefore, I view the fact that it has not fallen with the broader market as an opportunity to add a bit of short exposure in the name at current prices.
Amazon (AMZN) like Green Mountain, shares are fully valued at 97X earnings and the company is a proven growth business. The bulls will tell you that Amazon will soon control the entire planet and will then move towards other galaxies for revenue growth while the bears point out that free cash flows at AMZN on an adjusted basis are not robust and that the current P/E ratio and valuation are not sustainable.
I tend to agree with the bears here, though I respect the fact that this company seems to understand the customer. Amazon is simply too expensive in our view right here, and given that the market looks weak overall shorting a bit of AMZN in the $210 range looks to be good for a trade.
Peet's Coffee (PEET) is another strong brand name with good growth of around 9% and a strong industry tailwind in the coffee space. That being said, PEET shares are valued as richly as the coffee tastes and the 38X P/E could leave investors with a nasty hangover in the near future. PEET is a good short here but investors should look to sell call options or buy in the money puts as a way to conserve capital and to gain leverage into the move.
In other words, buying puts with money you can afford to lose makes more sense to me than shorting the shares directly because put options generally have a defined risk and a defined reward whereas shorting has the potential for unlimited risk.
Simon Properties (SPG) is another "leader" which to me looks quite vulnerable to a sudden crash. SPG shares are still trading for over 25X free cash flows and I view this as a 15X free cash flow story, leaving investors at current prices with little in the way of margin of safety. I am not an expert on its properties or its valuations however, and I admit I have been wrong on this one in the short run.
PowerShares QQQ Trust ETF (QQQ) the Triple Q's or "the Que's" still look expensive to me if you take out the top five names in the index, which represent around 40% of the fund. AAPL, MSFT, INTC, CSCO, GOOG all look to be reasonable values here so investors looking to go short QQQ should buy a similar amount in these five names or a at least two of them to get a good "long hedge" against a QQQ short position. The QQQ is trading for over 20X earnings last I checked but that is not weighted using correct position sizing for the top 5 components.
Salesforce.com (CRM) is a strong company with a growing business but the valuation on the company's business is simply too lofty. Investors should be careful investing in stocks with P/E ratios over 400X because over the long run the laws of gravity tend to work against such high beta, high P/E names.
What goes up may end up heading back down. CRM is a wonderful business I am sure of that, but the company's valuation has made this a favorite short idea of ours for over 8 months now.