MDCigan

25 Good Short Candidates

"but your closing sentence: "should not be trading near their 52-week high." is a first line risk control measure that immediately eliminates this as a "good" short candidate for any professional trader I know, including myself. In a general bull market, we do not short stocks at, near or just above their 52-wk high. On the contrary, it's generally a good idea to buy in these situations, although I wouldn't want to own CVS for reasons you mentioned, as well as other internal research we have on the sector and CVS in particular. Remember markets will stay irrational longer than you can stay solvent. "

I completely agree with this sentiment. One ticker comes to mind. CROX. I think at some point this probably becomes a great short, but I am not stepping in front of a freight train to get run over. In my view the valuation is somewhere between absurd and insane in terms of pricing in future growth expectations, but who knows how high the market can build this "castle in the sky".

25 Good Short Candidates

"MDC,
All of the data is fundamental; I update long and short once per month and judge them accordingly, but I think one could extend each hypothetical portfolio 6-12 months and still do fine."

Perhaps I'm missing something here, but I don't follow this. In my view, there is absolutely no connection whatsoever between 1-month stock price performance and fundamental factors. Over a 1-month time frame, stock price behavior is probably some combination of technical factors (I do believe in things like stock price trends and oversold/overbought) or just statistical noise (for those more inclined to random walk theory).

"At the same time, the company just doesn't excite me enough to say I would buy it either - I'd prefer to grab more focused companies in areas I like than get all the diversification that is GE."

I agree one can probably find stocks with more upside then GE, but that is different then saying the stock is an attractive short.

"I can't argue the past with ERTS or ATVI, but I can say that with ERTS, their development seems primarily geared to Sony's platform, followed by Microsoft. Nintendo is far in the distance in terms of product offerings and hence revenues, but with the Wii outselling the PS3 I can't see how that translates positively for ERTS in game sales. PS2 was the dominant console for a long time, and many game developers certainly benefitted from that because Sony wasn't focused on game development and let others control that space. That just isn't the story with Nintendo..."

This is true, but it might prove dangerous from the short side to underestimate just how quickly ERTS might be able to turn the ship around and ramp up development for the Wii and start having success on that platform. In my view, the video game industry is still one of secular growth, and in general I think one of the best investment strategies is to go long companies in long-term growth industries which are experiencing "temporary" problems. The key question is are ERTS' problems "temporary"? Time will tell, but if I were forced to bet, I'd bet on them fixing the issues and developing a strong line-up of titles for the Wii that bring the company back to strong profitability.

I appreciate the discussion.

25 Good Short Candidates

Interesting. Quite a few of your short picks actually look interesting to me from the long side with the top 2 being GE and ATVI. You mention these selections are purely the result of your quantitative model. I can understand if you'd rather not share, but I'd be interested to know what quantitative factors lead to GE and ATVI being short candidates. What is the time frame on your model? Are these selections intended to capture 6-month price movement? 1-year? 3-years?

In GE, you've got an above-average company selling at a market multiple, earnings growth rate that appears to be accelerating, and a pretty hefty dividend yield, and from a technical perspective it appears to be breaking out of a long-term consolidation pattern. We're at 40ish right now. I'd bet we see 50 before 30. It looks a little overbought here, but the entire market looks overbought. Maybe we see a pullback to 35-37, but I just don't see any reason to forecast substantial market underperformance over the next 1-2 years which makes me wonder what specific quantitative factors lead you to that conclusion.

I think your qualitative comments on the video game makers miss the mark. The fact of the matter is if you look at the really long-term performance (past 5-10 years) both ERTS and ATVI have created substantial shareholder value. Historically, the gamemakers have rallied from the summer to late fall/early winter in anticipation of the strong holiday sales. This particular year is likely the sweet spot for this current cycle roll-out and ATVI has a pretty compelling game line-up. From a technical perspective, the stock appears to be consolidating around 18 with some high volume up days (big money accumulating the stock).