Soul Food For Your Portfolio Blues

Includes: AMZN, CMG, CRM
by: Hedgephone

Despite the unprecedented expansion of the Federal Reserve balance sheet, the rise of U.S. corporate debt, unstoppable government spending, and despite massive stimulus measures, the U.S. stock market has lost its groove. Most stocks are overvalued and you can't print jobs. It's likely time to batten down the hatches, to tighten your belts, to sound the alarm bells, and to protect your assets (if you still have any) from what could be a long and drawn out nuclear winter for the global economy.

Yes, technically the bears have "got it wrong" (well, when priced in terms of gold rather than dollars, the market is down around 60% since 2007, but I digress) on the stock market since 2008. But this isn't 2009 anymore and much of the gains in the market simply put us right back to where we were (2007 price levels) in terms of nominal price and also valuation. It's the new bubble and like the old bubbles this one will probably pop. The key is to wash the economic wounds quickly and leave them alone to heal. Many economists and pundits think we need more spending, more debt, and more wars to heal the economy even though the stimulus failed miserably the last time around. I take the "Granny Hawkins" (of Outlaw Josey Wales) view of this economic wound treatment:

"I say that big talk's worth doodly-squat. Now, them poultices be laced with feathermoss and mustard root. Mind you drop water on 'em occasional and keep 'em damp."

Sometimes wounds just need time to heal. Sometimes picking at the scabs make the cut infected and only make things worse. Listening to snake oil salesmen is hazardous to your economic health. Sometimes it feels like making things worse is the goal of the stooges we elected and the mega-cap corporations that purchased them. Nevertheless, it's only a good reason for getting out and voting this fall. While I am voting Obama, I will be happy to see Uncle Ben deposed even if it's only ceremonial by a Romney White House. Obamney 2012 indeed.

Here are some decent short candidates to hedge your long book with in a time of overvalued stock markets and frothy, wasteful stimulus:

Amazon (NASDAQ:AMZN) -- Amazon is valued at an incredible multiple and to many market observers and traders, the stock looks to be a "no-brainer" short. Not so fast. Most of the short sellers in this name have been wiped out to the point of requiring public assistance. The reason the stock is so loved and its faithful so dogmatic is the fact that Amazon "is the future" of retail in the mind of most investors. The rush to invest in the "new" thing is just too compelling. Like any true story, a fairy tale ending may not be waiting in the wings for longs willing to pay 300X earnings for this distribution concern. I for one am more interested in going short on Amazon with a tight stop loss in place. I would close my position after a 15-20% gain or a 1-2% loss. While I can expect a few small losing trades when the trend is against me, catching the meat of a down move can be done in both bull and bear markets. Such a "trend following" approach to value investment based short selling may seem like some managers to be "style drift" but the technical aspects of trading over and undervalued securities should not be ignored. Stop loss orders help traders survive and sleep at night.

Chipotle (NYSE:CMG) -- One reason I tend to agree with David Einhorn on this stock is the Taco Bell (NYSE:YUM) comparison. For $2, consumers can eat a Double Decker taco with a Pepsi and a bag of Doritos. I am pretty sure that surviving off of nothing but Taco Bell is somewhat hazardous to one's health, although I knew more than a few ASU Sun Devils that received all of their nourishment from running to the boarder and some of them were actually quite attractive members of the opposite sex. While I am personally into the non-GMO movement, I also understand the difference between a $13 lunch at Chipotle and a $2 value deal. Many folks will risk infertility and tumors for a cheaper value meal, including myself, though I concede that Chipotle is vastly more healthy than anything YUM Brands can offer. Both of them leave you feeling full, sleepy, and somewhat satisfied yet there is clearly a huge difference in price. I think the important thing to focus on is where the overall economy is heading and whether or not the aspirational Chipotle customer will be able to continue spending the big bucks on a Burrito Supreme. To me, the trade is a recessionary one and it involves shorting CMG and going long Yum Brands. While not a perfect pairs trade by any means, the difference in valuation is compelling enough to warrant a solid opportunistic trade. Many readers think shorting anything is immoral or evil, but in reality it is simply commerce in a marketplace and should be encouraged. When the herd all heads one direction, often the opposite direction proves to be the prudent course. (NYSE:CRM) -- Salesforce is a great business in a highly complex and hard to understand technology field. All that traders hear about is how important the cloud is and how all technology companies must embrace the cloud or become extinct dinosaurs. OR it could become even worse -- take Hewlett Packard, for example, which was forced into paying way too much for hard to understand cloud companies with little to no revenue all the while neglecting their core competencies (what are they again?). In any event, Salesforce is certainly no HP but the company is so incredibly expensive and unprofitable that CRM may actually underperform HPQ strictly because of valuation. CRM is trading for an astounding and unreasonable 174X EBITDA with no profits and most of its cash flow coming from increases in liabilities (borrowing money). While this is a great company, it may turn out to be a bad investment over the long run at current prices.

Disclosure: I am short CRM. 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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