The S&P is up almost 17% for 2012 after the approximate 13% run over the past few months. The rally is starting to feel more and more stretched. I have sold some of my winning positions that have had huge runs to raise more cash. I am also actively looking for shorts as many stocks are starting to enter "nosebleed" valuations.
I'm being cautious on my shorts simply because I think money managers will chase any dip in the market, given their horrid performance against their benchmarks this year. However, one stock that cries out to be shorted and that I had to take a small short position in immediately is Rackspace Hosting (RAX).
According to the business description from Yahoo Finance, "Rackspace Hosting provides cloud computing services, managing Web-based IT systems for small and medium-sized businesses, and large enterprises worldwide."
Here are seven reasons why RAX is a short at $65 a share:
- Amazon (AMZN) is entering this market in a big way. This is likely to be a long-term headwind on pricing and margins.
- There is a limited moat to enter this business. RAX is also selling at the top of its historical average based on P/E, P/B, P/CF, and P/S.
- Insiders have sold almost 2 million of their shares over the last six months. There have been no new purchases over that time frame.
- The stock sells at approximately 100 times trailing and 60 times forward earnings. It is also selling at its 52-week high.
- Of the last 12 earnings reports, the company has beat consensus five times, met consensus four times and came in below consensus three times -- not the consistent overperforming earnings reports one would expect from such a high-flyer.
- The stock has no dividend and has a five-year projected PEG of almost 3 (2.74).
- Earnings estimates for FY 2012 and FY 2013 have actually come down over the last two months, in the same period the stock has run up some 40%. The stock is overdue for a rest.
