So Much For That Bubble Of 'Overvalued' Stocks

by: SA Editor Rocco Pendola

Ask people who know me. I am a pretty humble dude. In addition, I take very little for granted. Whenever I experience "success," I start to make contingency plans for what I will do when my fortunes reverse on a dime. That might not be the easiest, best or most relaxing way to live, but, for one reason or another, that's how I roll.

I had to use that disclaimer, one that really does come from my heart, ahead of making the type of somewhat self-patronizing statement that I do make from time to time.

Last year, I nailed the two shorts of 2011 - Netflix (NASDAQ:NFLX) and Research in Motion (RIMM). I was so right on both stocks that it scared me a bit. Lots of people took notice. Ever since I made those two calls, I've received two distinct types of emails.

People writing with thanks and offers of free beer and lunches comprised one set of emails. The other track included folks asking "who's next?" I could never get quite comfortable with the notion that somehow, on the basis of being right about NFLX and RIMM, I was the guy to call for the next short. I've written a bit about that. My overarching point - you cannot go out and look for long-term shorts like NFLX and RIMM. You have to let them come to you.

In any event, many readers who emailed highlighted four stocks they wanted me to look into. Most of them were convinced that (NASDAQ:AMZN), Chipotle Mexican Grill (NYSE:CMG), (NYSE:CRM) and Lululemon (NASDAQ:LULU) were the next to go down. That's worked out really well.

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Now, of course, you could have made money shorting any of those names over the last year. Maybe lots of money. But, you can say that for virtually every stock in the universe, even Apple (NASDAQ:AAPL). And you were not going to make those profits without timing things nimbly and taking on considerable risk. That's not the type of short situation most long-term investors want to get into.

Long-term investors want what I call long-term shorts. They do not want the stock that's going to come crashing down on an earnings miss. That's too risky. If that miss happens to be a beat or forward guidance looks good, you could find yourself wiped out. This type of investor - who I consider more common than the alternative risk-taker - prefers to short stocks (or buy puts) of companies with long-term stories that are broken and will continue to break. This describes Netflix and RIM to a tee. My article history from the last year on each company makes that quite clear.

In terms of AMZN, CMG, CRM and LULU, I am not sure you can say the same. I will recuse myself from the discussion on CRM. Frankly, I do not follow the company or stock closely enough to offer an opinion worthy of your consideration. But, I can say with a relatively high level of confidence that broken stories and dismal futures do not apply to AMZN, CMG and LULU.

Without using the shallow and hollow argument of valuation, please explain to me how these three companies will share the fate of Netflix and RIM. Using the valuation line is the same as your mother telling you not to do something. Then, when you ask why, she says because "I said so." Sure, you could choke if you eat while lying down or catch a cold if you go outside with your hair wet, buy why!? Sure, AMZN, CMG and LULU all have really high P/Es and lofty valuations, but why does that matter? And what comes up must come down or reality will soon set in is not a suitable answer.

After I digest the comments in this article, I will write a Part Two to that makes the case for the continued success of each company and its stock. I have already done that here and there over the last year in my Seeking Alpha articles. But, I will bring it together after AMZN, CMG and LULU bears attempt to cherry-pick evidence to support the outcome they so desperately desire.

Disclosure: I am long AAPL.

Additional disclosure: I am long NFLX June $40 put options.