By Chris Seabury
One of the challenges with shorting stocks is finding companies that have the downward pressure to head dramatically lower. This can be tricky based on conflicting signals and emotions about the corporation. To identify the right stocks to short requires utilizing both technical and fundamental ideas. This will provide specific insights about the total amount of weakness. To determine possible short candidates requires examining Yingli Green Energy (NYSE:YGE), AOL Inc. (NYSE:AOL), Clearwire (CLWR), First Solar (NASDAQ:FSLR) and Level 3 Communication (NYSE:LVLT). Therefore, the use of all analysis and opinions should be a starting point for future research.
Yingli Green Energy
Yingli Green Energy has profit margins of 6.71% and operating margins of 12.57%. There is no forward price earnings ratio. The balance sheet includes revenues of $2.56 billion, $938.47 million in cash and $2.19 billion in debt. During the last year earnings have been steadily declining going from $.52 to a -$.18. This has caused the stock to trade below the 200 day moving average of $6.42 (which is bearish). However, the total amount of volume have increased since the beginning of the year. This is an indication that buyers are becoming interested in the stock. This is based on the fact that the firm is aggressively seeking to expand into the United States. The problem is that the U.S. market is currently saturated. This means that the company could face continuing pressure on profits and earnings. These facts are illustrating how this is a good possible short with shares rallying off of $2.75. As a result, investors should watch the volume and earnings reports. If the volume starts to weaken it will more than likely be at a key resistance level (i.e. $6.00 or $6.50). Whereas, a decrease in earnings could serve as a catalyst that will push shares lower. This could be an ideal entry point for a profitable short. Therefore, investors should monitor the price, volume and earnings to determine the best time to open a short position.
AOL Inc. has profit margins of 2.54% and operating margins of 5.60%. The forward price earnings ratio is 43.33. The balance sheet includes $2.22 billion in revenues, $444.01 million in cash and $112.08 billion in debt. In the last 52 weeks earnings have been volatile, declining from $.70 to -$.11. This based on the fact that AOL is losing core customers to DSL and cable providers as customers realize they do not need to pay for AOL's substandard (relative to gmail) email through $15/mo "Advantage Premium" and $12/mo "Advantage Plus." Moreover, there is the potential for consumers to defect because AOL is charging consumers with DSL or broadband for these email accounts as well as additional dial-up fees. In my opinion, as this sentiment continues to percolate through media it has caused the price of the stock to trade below the 200 day moving average of $16.42 (which is bearish). However, since reaching $10.06 in October the stock has been moving higher on light volume. These elements are showing how AOL is an attractive stock to short. This is based on the poor fundamentals (i.e. forward price earnings ratio, low profit/operating margins and the balance sheet). The recent rally over the last few months is not based on any kind of conviction from buyers. This means that the stock will face continuing pressure from weak momentum.
Clearwire has profit margins of -55.90% and operating margins of -161.14%. There is no forward price earnings ratio. The balance sheet includes $1.09 billion in revenues, $687.10 million in cash and $4.05 billion in debt. Over the last year earnings have been declining from -$.33 to -$2.33. The high amount of debt and lack of customers in building new wireless networks is placing pressure on the stock. This has caused shares to trade below the 200 day moving average of $2.96. Since the beginning of the year there has been a rally in the stock to $2.50. The problem is that there were limited increases in the volume with no follow through. As a result, Clearwire is an ideal short because of the poor momentum. These factors could cause shares to fall below long term support of $1.24.
Level 3 Communication
Level 3 Communications has profit margins of -17.30% and operating margins of .46%. The balance sheet includes $3.73 billion in revenues, $461.00 million in cash and $7.78 billion in debt. During the last year the earnings have been volatile going from -$.45 to -$1.80. This has caused the price of the stock to trade below the 200 day moving average of $25.88 (which is bearish). Recently, shares have traded off of the 52 week low of $16.51 on low volume. Moreover, the firm is increasing the total amount of outstanding debt through the public markets and private placement offerings. These facts are illustrating how Level 3 Communications is an ideal short. This based on the poor fundamentals, lack of earnings and increased debt levels. Whereas, the stock has negative momentum that is currently in bear rally. This is indicating that shares are starting to top out and could reverse near a key resistance level. If this happens there is a possibility that the price could break lows. This is when the stock can reach the multi-year low of $9.00. As a result, Level 3 Communications has the potential to remain a strong short candidate throughout the year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.