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, PDL Capital (146 clicks)
Value, special situations, long-term horizon, small-cap
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I took some time over the holiday to scour through the Dow Industrials, searching for 3 stocks to short for my portfolio for 2012. For whatever reason, the start of a new year just gives me a certain clarity regarding where a company has been and where it's going. I didn't just want any three stocks, though. I wanted three stocks I could short and have reasonable confidence of a 20% return. Mind you, I would set a stop loss on all shorts of 7-10%.

My first choice, and I can’t believe I’m saying this, is McDonald’s (NYSE:MCD). It’s not that the company itself is in any kind of trouble. In fact, it’s doing great. But the stock is trading at an all-time high of $100. That’s a P/E of 17 on 2012 earnings, which are supposed to grow at 10% year-over-year, and the same over the next 5 years. On 2015 earnings of $8.35 per share, the company still trades at a pretty hefty multiple. I think we’ll see some serious profit-taking at some point this year.

I see a 20% return possible in shorting Bank of America (NYSE:BAC). That means a drop from $6.33 to $5, a price which B of A has already seen. There is uncertainty surrounding its toxic mortgage portfolio, and the government is suing the bank along with 16 others for its role in the mortgage nightmare. I also didn’t like Warren Buffett’s $5 billion investment. It was obviously intended as a vote of confidence, but why should any bank need such a vote unless it had some kind of trouble brewing underneath?

I’m also going to ding Verizon (NYSE:VZ). Competition is just too fierce in telecom to have much faith in the company going forward. I will say that its dividend may keep the stock aloft, but seeing how the stock did hit $33 last year and it currently trades at $40, and how things in telecom are neutral to worse in the past year, it only will take one bad piece of news to hit that 20% return target.

Source: My 3 Must-Short Dow Stocks For 2012