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Larry Meyers, PDL Capital (76 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 (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 (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 (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