Two Stocks to Consider Shorting

Includes: STRA, TBT
by: Chris Fernandez

In the course of the last year, I have tried to keep my stock picks on this site long-only.

I believe it’s time to make a change and start including short positions in the portfolio as I feel that we are missing out on significant opportunities that would allow us to thrive in any market conditions, especially now.

I wanted to touch briefly on my reasons for deciding to include potential short positions in my watch list, and give you a couple of ideas that I am thinking about right now.

The Case for Shorting

In this market in particular, but in any market, shorting stocks is a fantastic way to hedge your long positions, and make some great returns betting on companies with poor fundamentals and those that are strategically flawed and going to $0 (sorta like uWink!).

If you would like to read an overview about shorting and my thoughts on it as it pertains to a couple of companies in my portfolio, click here.

At any rate, I have tried to keep this site simple enough for the average investor, yet sophisticated enough for hardened traders to all benefit from it and get ideas to add to their own portfolio.

I don’t think that creating short positions will complicate that too much, but I did want to stress to those that are unfamiliar with the concept of shorting or who are not comfortable doing it, that it is very dangerous, and you can lose a lot of money very quickly.

You need to be very vigilant with your stocks, have trailing stop orders, stop-loss orders, and a whole host of other intangibles that you don’t have to worry about in a long-only portfolio.

The upside is that we get a chance to take advantage of the darker days of the market and make money off of those days, instead of just being pummeled while our stocks are taken down.

I will always add a warning to any stock/ETF that I short to let you know of the risk rating for that trade, as I do with all of my long-only trades, but suffice it to say, this is a more difficult and cumbersome trading strategy that can be very lucrative if done properly.

Here’s how it will work

I intend to take advantage of shorting stocks from here on out, and you’ll now see this in my “Portfolio Recommendations” where I will designate stocks that I am selling short with an “(NYSE:S)” next to the ticker symbol.

The same will hold true for positions that I am buying to cover, or recommend buying to cover. They will also contain an “(S)” next to their ticker symbol.

But be careful!

Because a stock that I am recommending you short will be in the “Sell Now” section, it is actually the exact opposite of the action you should take with a position if you were long-only.

Instead of selling the stock outright in a traditional buy low, sell high scenario, I am instead telling you to SHORT the stock now (sell the shares short) and START a position in the company betting that its price will decline.

The same holds for stocks that you’ll see in the “Buy Now” section.

Traditionally this would mean that I want you to buy those stocks for inclusion into a long term holding portfolio.

But it will mean the exact opposite if you see the “(S)” next to the name.

I want you to END your position in this stock by buying to cover the shares you had previously sold short.

If you aren’t comfortable doing this, and understand what I am talking about, then I would suggest you not even attempt to trade the shares of stocks that I recommend shorting at all and just pay attention to my long-only suggestions.

2 Stocks to Short Right Now

I will touch briefly on one of the names that I am looking at now because I’ve covered it before while the other name will be new to some of you so I will go into some more detail on it.

These are not yet formal recommendations, but they are a couple of stocks/ETF’s that I am watching to start a short position in because of compelling evidence to do so.

  • Ultrashort Lehman 20+ Year Treasury Proshares (NYSE: TBT): I have spoken extensively about the wonderful opportunity we have with this ETF and betting on the treasury yield increasing, and thus, the price of Treasuries decreasing.

Because this is a double inverted ETF (meaning you make 2 x the price move in the opposite direction), we don’t have to worry about traditional shorting and selling shares short and then buying them back.

In this case, all we would do is trade this ETF like a normal stock in that we simply buy our shares, the ETF then tracks the double inverse of U.S. Treasury prices, and we sell like a normal stock when we have hit our targets or are stopped out of our position if we protected ourselves from losses.

Because this ETF has had a very nice run now for the last month or so, I am waiting for a pullback before getting in as well as waiting on word about what the Fed has in store in their quest to save the banking system, inject more money into the markets and generally stick their nose into everything.

They can manipulate these markets for a time, and until there is more clarity regarding the liquidity and financial system, I am holding off on purchasing this ETF for now, but it is on my radar screen for possible inclusion.

Want more?

Read my initial write up about the TBT by clicking here.

  • Strayer Education (NASDAQ: STRA): This is an education company that provides post-secondary education through Strayer University and online. It also runs education loan processing, which was started to administer the company’s student loan portfolio.

The stocks in this sector have been one of the few bright spots in this market, and have had an incredible run as those that are laid off, out of work, or those wanting to spruce up their resumes are flocking to online and other post-secondary schools like Strayer to increase their marketability in these troubled times.

The question is, are these companies’ stocks way overdone?

I believe the answer is a resounding yes, and out of the group, Strayer seems to be the one poised for the biggest meltdown.

I found some analysis on Strayer by a fellow Seeking Alpha contributor named Dan Caroll.

I received permission from Dan to re-post some of his content of his short thesis on Strayer below.

You can read the entire article by clicking here.

“So what do I not like about this company, and what do I think the company’s fair value is?

1) The Chairman and CEO sold out of 95% of his holdings in the company on December 3rd!

I can understand he might have wanted some extra cash for the holidays but 95% of his holdings in the company. Is he joking? Apparently, he thinks the stock is priced to perfection as I do. How can he be completely upbeat about the company in their latest conference call if he is selling the lion’s share of his holdings?

2) Expected growth in earnings per share next year is over 32%. The annual earnings per share growth the past 5 years for STRA is 20%, but suddenly Superman Strayer is going to pick their game up 60% to grow at 32% in 2009 in a recession? Am I missing something? Please spare me that these companies usually do pretty well in a recessionary environment. All these people who lose their jobs are going to have such an easy time getting loans to go back to school in this tight credit market right? I don’t think so.

What do I think is the fair value of the stock? Let’s assume that the market prices this stock back to the lower end of its historical P/E ratio to 25 and let’s assume new campus openings slow down, there is modest bad debt expense from their loan portfolio, and STRA’s growth rate is 20% next year, you have earnings per share of 6.36 and a stock price of $159. Long term, I think the growth rate drastically changes for the education companies. No longer will they be growth stocks but more maturing companies. With that thesis, let’s assume a P/E ratio of 18, and growth in earnings per share of 10% from 2010-2013, you have earnings of $9.30 in 2013 and a stock price of $167, 30% lower than today’s $218.

My mom always said, “No one is perfect.” I usually countered with, “Mom, how do you explain Cindy Crawford then?” She responded, “Even she gets caught without her makeup on.” Well, smart money hiding in these stocks will eventually learn that STRA has blemishes too, and the stock will correct hard. I have 60% of my desired short position and plan on dollar cost averaging on strength.

Time frame: medium to long-term.”

To read Dan’s bio and learn more about his investing style, click here.

I’ll have more on STRA if I decide to short the name, but I think now is not the time. These stocks are still in favor and showing extreme strength.

I’ll wait until the stock price declines further and crosses several support barriers before deciding to get in.

The very fact that the CEO sold almost his entire stake in the company is one of the most troubling forward-looking factors that I have ever seen.

  • Some of the other companies that you will now see in my “Watch List” that I am considering for short positions for a whole host of reasons include: Netflix (NASDAQ: NFLX), First Solar (NASDAQ: FSLR), Loopnet (NASDAQ: LOOP), BJ’s Restaurants (NASDAQ: BJRI), Panera Bread Company (NASDAQ: PNRA), and Buffalo Wild Wings (NASDAQ: BWLD).

Bottom Line

The bottom line is that I am expanding my coverage universe to allow us more flexibility and freedom to hedge our positions, and make money in any market conditions, whether they be good or bad.

Through intelligent shorting (I believe every portfolio should hold some short positions), we further increase our chances for beating the market over the long term, provided those bets are made in the same intelligent and thorough manner with which I make all of my picks on

Stay tuned.

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