5 Potential Shorts To Consider

by: Hedgephone

The current stock market decline is starting to look more and more like a true bear market and not just a short term correction. The Russell 2000 is already off some 23% since August 1st, and the S&P is down 15% over that period of time. While calling a market top is extremely difficult, finding a true market bottom will likely be just as hard for most investors. In this environment, it pays to avoid risks and stick to a well defined plan without flip flopping. For me, that means having long positions and also short positions taken via bear call spreads or put spreads. Here are 5 stocks we view as strong sells due to valuation or other risks which we would avoid or sell short using tight stop loss orders.

(NASDAQ:HRBN) -- Harbin Electric is the M&A arbitrage play that seems to never actually goes into the M&A phase. Harbin's chairman has made an offer for the business but the transaction appears to be, well, taking a long time. Andrew Left of Stock Lemon has done a good job of investigating the Harbin buyout and he thinks the whole entire company is largely a scam similar to CCME and others. Harbin could be the real deal, but after the collapse of so many Chinese reverse mergers, investors should likely avoid this name due to the fact that the potential upside is around 15% while the downside is more like 95% if the company is cooking the books as many experienced short sellers suggest.

(NASDAQ:PANL) -- Shares of Universal Display look pretty pricey at 60X sales and a price to book value around 7X. PANL has managed to earn some money in the last quarter which reverses the trend of consistent losses for the company. That said, the $3MM in quarterly earnings does not warrant the recent run in the stock in our view, as the shares have moved from a low in the $27 range in August to a price of around $51 on Friday. PANL shares may have a hidden catalyst that I am not aware of making Universal Display a turnaround play with decent growth prospects, but at current levels with little in the way of earnings I feel the shorts have a better risk/reward in this name than the longs.

(NYSE:LNKD) -- At 450X earnings, LinkedIn looks like a classic short seller's dream stock. The company is fantastic and their business model is top notch. The valuation, however, is far too optimistic to make any objective sense in my view. Obviously, the stock market is valuing LNKD based on eyeballs, members, mouse clicks, potential, and user enthusiasm and not earnings or cash flows. If LNKD was valued on cash flow and earnings, the stock would be some 40%-80% lower than current levels. LNKD is currently worth around 6 times as much as AOL, yet AOL has more than doubled the amount of unique visitors as LinkedIn. Clearly, the fact that LNKD is "new" is driving the stock much as this "newness" drove AOL to be worth four times as much as it is today back in 2000. In other words, just because something is new does not make it priceless.

(NASDAQ:WPRT) -- Although I really like Westport Innovations as a company, as the theme toward clean fuel has legs and makes a lot of sense, I view WPRT as too speculative of a play on Natural Gas trucking. The stock is currently facing headwinds given that the name has run very far very fast while earnings have not materialized in any significant manner. While natural gas engines are scheduled to arrive next year, the current valuation of the stock leaves a large amount of room for a significant selloff before the future growth in the space is unleashed. I am huge fan of natural gas and the Pickens Plan, but this name faces some headwinds on valuation which is why I am somewhat bearish on WPRT shares even though I am actually bullish on the underlying prospects of the business and the future of natural gas. Natural gas is a no brainer for the U.S. economy and is the only viable way for this country to gain energy independence.

(NASDAQ:WYNN) Wynn -- One thing about 2008 that many investors quickly forgot was just how low the casino stocks fell during the worst crisis since the Great Depression. Many investors feel we are headed right back to the lows of three years ago, because none of the fundamental problems in the economy have been substantively fixed. The bears feel that bailouts and Band Aids are only scratching the surface of the issue, while the repeal of Glass Steagall is the real underlying cause of the current depression. If this is true, investors in WYNN should be very careful. Las Vegas Sands (NYSE:LVS) shares lost nearly 90% of their value in 2008, and if 2011 ends in similar fashion, the casino shares could once again be some of the worst places to be during the financial storm. WYNN shares trade for 45X earnings which leaves plenty of room for multiple contraction in a bear market. While I am a poker player and a fan of the resort, I have to admit that a Wynn short position looks like pocket Jacks preflop to me -- a pretty solid hand but one that carries plenty of risk.

Disclosure: I am short HRBN, LNKD.