We look to buy undervalued stocks that have positive catalysts on their side and secondly to short usually as a hedge overvalued stocks that have negative fundamental catalysts coming into view. The following 8 stocks met our criteria for being severely overvalued and possessing at least one negative catalyst that could derail future growth and earnings estimates and cause analyst estimates to decline significantly.
MAKO -- Mako Surgical lacks a very important catalyst for higher prices and a higher multiple and that catalyst is positive earnings. Mako has a long history of losing money developing robotic arms and other prosthetics and high tech products in the growing medical device manufacturing industry. The trouble with Mako is that despite the company's obvious sustainable competitive advantage in the form of the technology portfolio, the valuation given to future earnings expectations are far too high in our view. We would pay 30X earnings for this type of company if it can grow at a 30% clip, however we do not see this type of valuation for MAKO shares anywhere above a $20 price tag.
CROX -- We were vindicated a bit in our short sale recommendation on Crocs Inc. this summer, as the name dropped from $32 to under $25 in just a month or so, but what a month it was indeed for equities. Nearly all of the gains from last fall's mega-rally were wiped out in the first fifteen trading days of August. It was a rough month indeed, and CROX was not spared. Although at 20X earnings the shares appear to be reasonably priced, this company's earnings may be once again impaired as they were in 2008. Crox lost too much in 2008 in my opinion to be a 35X earnings type of business if we "re-enter" the ongoing recession/depression.
SPG -- Mall real estate seems to me to be a risky bet and I would rather be a renter than an owner. Well, investors in Simon Property Group are the owners of the real estate and not the renters, which is why I still like SPG as a short position. The small dividend yield may look attractive versus ten-year treasuries, but if SPG common hits ten times free cash flow, which is my estimate of intrinsic value, then investors could receive double the yield with a half-priced stock. In other words, don't be fooled by a tempting yield if a stock is too richly valued.
IWM -- The Russell 2000 is one of the few index funds that has entered into a true bear market where the price is down more than 20%. In fact, the Russell 2000, which we have been panning openly now for a full year, has fallen from a high of around $86 to $67 a share, for a loss of around 22% from peak to trough. I still feel this index fund is as much as 40% overvalued at current levels, so hedgers could buy puts and sell calls on this fund for a hedge against any long positions. As an aside, we are finding some decent values at current prices though our market direction model is still in cash at hedgephone.com and has pretty much been either short the equity markets or in cash since March.
LNKD -- LinkedIn is one of the banker's greatest triumphs this year, because with a stock like LNKD valued at 490X earnings, the investment bankers can convince companies in the online media space to go public at huge premiums to intrinsic value. In my view, most dot com 2.0 companies should at least consider going public at present and find a good way to invest the proceeds to eventually meet earnings expectations of the market. I do think it's possible for many businesses to accomplish such a feat, but I don't think Linkedin can capitalize on its market valuation fast enough for the valuation to be reasonable at current levels. When it hits $45 or so, the valuation will be much more reasonable on a best-case scenario basis for the company and its investors.
SINA -- Sina Corporation has a very popular website in China called Wiebo.com, which makes this a tough short on huge up days. Sina has no earnings currently, however, and the shares may still be 30%-50% overpriced on fundamentals. I would be careful shorting this below $90 but over that price I feel this stock has significant downside going forward. Shorts looking to add a position here should consider selling the October or January $110 SINA call options as a safer way to enter a longer term short position on this name.
AMZN -- Amazon.com has been riding high on strong fundamentals in the web shopping vertical, which is slowly overcoming the brick and mortar shopping vertical if you believe the analysts and talking heads on CNBC. Amazon's market valuation of 95X earnings, however, makes this name an interesting potential short position again, after the stock dropped to $170 and rebounded to $217 over the past three weeks. Be careful here, but selling calls once again seems like a prudent way to get short Amazon at current levels.
CRM -- Salesforce.com shares are still too expensive no matter how fast their core business is growing. It will take 100 years for a buyer of this business to get his or her money back if growth expectations don't prove to be as robust as the analyst community currently believes. Short sellers in CRM should look to go long an Microsoft (MSFT) or Intel (INTC) as a "long hedge" or should stick to selling a bear call spread to lower risk.