Stocks To Sell Short When The QE Adrenalin Wears Off

by: George Kesarios

Whenever the Fed or the ECB print money, that money enters the market first and the real economy (if at all) later. Open market operations of any type and of any asset, basically puts money in the hands of market participants

For example, if the Fed buys on the open market $10 billion in government securities, that money will be put into the hands of the previous bondholders. Since these guys are investors, they will then take this money and buy something else with it.

Given that government bond yields of very high credit quality (U.S. or European) yield almost zero, chances are that these investors will buy either a higher yielding bond (probably corporate) or will buy stocks. As such, open market operations of any type are a shot in the arm for the markets because the central banks boost the liquidity and the cash available to market participants.

When the above accrues, markets tend to try to front run the central bank in order to make a quick profit. Under these conditions, many stocks get overbought for no apparent reason. Also, under such conditions, rumors, tips and speculation have the leveraged help of the central bank.

Please not that we have had Q1, Q2 and now Q3. There has been a lot of liquidity in the market for some time now and market participants have become complacent with high valuations. But high valuations can not last forever and complacency is not a good enough reason for them to do so. Especially, when high valuations are the product of central bank liquidity and not of actual fundamentals.

As such, I present you with certain stocks that I think warrant your consideration for short candidates, for they are valued beyond any metric, that is reasonable to me.

Vulcan Materials (NYSE:VMC)

The only reason this stock has risen lately is because Martin Marietta Materials (NYSE:MLM) wants to take it over. The forward PE is about 200, Price/Book 1.62, Price/Sales 2.33, Return on assets nil, Return on equity -2%. As reported by Bloomberg, the current price is above the price of what MLM was hoping to pay for, which means that the market is betting that MLM will sweeten the deal. If this acquisition is successful, Martin Marietta Materials will be the biggest gravel and sand producer in the world. However, they might have to pay 40% more than they bargained for.

If, however, the deal with Martin Marietta does not go through, then there will probably be no reason for this stock to trade at current levels. Also, if MLM is able to acquire VMC, then MLM might be a short sale candidate also.

Follow the news on this one and not the chart, for if no deal goes through, VMC a good short candidate. Gravel and sand are really not that sexy.

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LinkedIn Corporation (LNKD)

Another case of a very expensive company. I like the company, don't get me wrong, but the valuation is simply out of this world. With a forward PE of 100 and Price/Book of 16.5 and Price/Sales of almost 18, this stock is just too rich for my investor appetite. Indeed sales growth is strong, but not enough to justify this valuation.

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Technically speaking, the chart does not give us much to go on, except for the RSI indicator which is overbought and MACD looks like it will cross over. Short if the stock falls below 90.

Yelp, Inc. (NYSE:YELP)

Again, my main beef with stocks like Yelp is valuation. With a forward PE of about 500, Price/Sales 15 and Price/Book 11, this stock is a perfect short sell candidate. The shorts have taken notice and about 30% of the float is sold short. Also take notice that short sellers are increasing positions, 4.1 million shares short as of Aug 31, as opposed to 3.2 million the prior month.

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Technically speaking, this stock has a pattern of selling off on an overbought RSI. In its current uptrend, it's not there yet, but it is not far from it. Any sign of weakness will be a short sale opportunity.

Baidu, Inc. (NASDAQ:BIDU)

Another overpriced stock, this time from China. Price/Sales of about 14, and Price/Book about 13. The trailing PE is 28 but the forward is about 18. This stock is not as expensive as the previous picks, however this one has something that the others don't have. A chart that is much more convincing this stock is a short candidate.

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Not only is this stock trading below its 200 day moving average, it's also in a long term downtrend and has gone nowhere for nearly two years. This company does indeed have impressive growth, but again, I don't believe it deserves such valuation.

The chart does not offer us an opportunity to short at this time. However, if the stock breaks down below the bottom long term trend-line, then chances are it will move much further down.

Lamar Advertising Co. (NASDAQ:LAMR)

This old fashion company sells and markets outdoor advertising. Not a bad business, but why this one billion in sales company is worth $3.3 billion, I fail to understand. The Price/Book is 3.7, Price/Sales 2.7, very little profits and with no sales or earnings growth to speak of.

About 17% of the float is sold short, with the trend increasing from month to month. I fail to see what Goldman Sachs likes in this company, but in my book, this is a dead money company, and dead money companies do not deserve such a high valuations.

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This stock has broken to the upside and technically speaking, it is not a recommended short candidate at the moment. Wait until you see technical weakness, for the market can be wrong longer than your short positions can remain solvent.

Bottom line:

If Fed adrenaline is driving these stocks up, it will wear off sooner or later. In any case, I don't believe that the fundamentals are the driver.

Remember, the only chance you have to make money in this game is if you buy cheap, or sell short something that is expensive. Live long, sell expensive stocks short and prosper!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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