Why High P/E Tech Stocks Are Ripe For Shorting Here

| About: Palo Alto (PANW)
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One of the few profitable plays in the three trading sessions after President Obama's re-election has been short plays. I consistently use bear market call spreads to establish short positions in what I consider overvalued equities. This lowers the volatility of my overall portfolio and at least gives me something to smile about when the market sells off like it did last week. (Note: I am down less than 1% overall since Weds due to these positions.) I did close out two of these positions late on Friday with Amazon (NASDAQ:AMZN) and LinkedIn (LNKD) as I had garnered over 70% of my possible gain on these spread positions that were due to expire early in the first quarter. I still believe these stocks are overvalued (but not as much before their recent declines) and will short again if we get any kind of rally in the shares.

I am keeping my short spread options open on some of the tech stocks I think are still overvalued like Rackspace (NYSE:RAX) and Saleforce (NYSE:CRM). Check links to see why I am short both names. I also just added a new short position late Friday on Palo Alto Networks (NYSE:PANW). Before I go into why I went short PANW, let me discuss why are I think high PE tech stocks are ripe for the taking here.

A. The market sentiment on the tech sector is currently negative. One needs to look no further than the recent declines and negative commentary on Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) to confirm this trend and both of these stocks have much cheaper valuations than anything I am shorting in the sector.

B. Most of these stocks have had very nice run ups over the year or so and are highly vulnerable to investors selling them in order to avoid the higher capital gains taxes in 2013, a trend that should run through end of year. In addition, most of these companies are headquartered in California where the good voters there just approved to increase the state income tax to 13.3% on high earners which should drive higher insider selling over the next six weeks (short term capital gains are taxed like ordinary income)

C. Corporate spending is in flux while corporate leaders judge the election results, what looks to be a long term contraction in Europe and wait for resolution to the "fiscal cliff". This is freezing IT budgets to a certain extent, not a good trend for technology firms.

Palo Alto Networks operates a platform that allows enterprises, service providers, and government entities to secure their networks and safely enable various applications running on their networks.

5 reasons the PANW is overvalued at $52 a share:

  1. Insiders have sold more than $25mm in shares over the past month. The stock is at where they debuted in late July and there are still plenty of insider shares still subject to lockup provisions that will fall off over the next six months.
  2. Consensus earnings estimates for both FY2012 and FY2013 have fallen sharply over the last three months.
  3. The stock is selling at over 120x forward earnings and almost 14 times annual revenues.
  4. Sales growth is already slowing. Revenue growth of over 50% in FY2012 is projected to be less than 40% in FY2013. In addition, the stock sports an astronomical five year projected PEG (5.77).
  5. Analysts are hardly positive on the stock recently. UBS, Northland Securities and FBR Capital have issued "Neutral" or "Market Perform" ratings on the shares in the last few months as earnings estimates have fallen.

Disclosure: I am short CRM, PANW, RAX. 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.