10-year

10-Year Anniversary Promotion (20% off)

Join GuruFocus Premium Membership Now for Only $279/Year

Once a decade discount

Save up to $500 on Global Membership.

Don't Miss It !

Free 7-day Trial
All Articles and Columns »

5 Potential Lucrative Shorting Opportunities

March 10, 2012 | About:
I have chosen 5 stocks that have recently experienced some great runs in an otherwise iffy market. However, in my opinion, these stocks have nowhere to trade but downwards. In this article, I will give my reasons, along with market analysts' opinions and data stating why you should seriously consider shorting the following stocks. Please take this article as a starting point for your own investing research and do your own homework to see how each stock fits into your investing strategy.

Lululemon Athletica (LULU) should be shorted because many indicators show it is at its top and has a lot of room for devaluation and little room for growth. This company is a new competitor in the high-end casual fitness apparel market. It has has fierce competition with the likes of more established companies such as Nike. Investors should look at shorting the stock because the stock has a stratospheric multiple. Goldman Sachs has left its target price of $64 dollars on it. In my opinion, when it's trading around $72 and has experienced a nearly 40% run up over the past two months, the only direction it can go is down. Along with Yahoo Finance's figures of the 1 year target estimate of $62.47 and its 52 week trading range of $36 to $72, I believe there is little upside and a lot of risk going long this stock. Personally, based on my research and my moderate risk tolerance, I would short this stock. There is also no room for growth based on rising commodity prices that directly affect this company's profit outlook. Increased input and raw material costs such as higher cotton, oil (raw material costs and shipping) and labor to create, ship, and retail the items are squeezing high-end casual fitness apparel retailers' profit margins. Lower profit margins equals less profit and therefore lower stock prices. Based on these factors, especially with no end in sight on input costs dropping anytime soon, and in my opinion shorting this stock seems like the only safe bet.

Groupon (GRPN) may seem like a stock with room for growth, but analysts' expectations are deceiving because of Groupon's underlying structural issues. At the time of writing, Groupon's financial statistics look positive because the current quote is $17 and has a 1 year projected target estimate of more than $25. This looks more appealing because its 52 week range is $15 to $31, lending one to think, in my opinion, that this stock has a lot of room for positive growth. However, in my opinion, I don't think there is much room for growth because Groupon is not taking full advantage of partnerships with complementary companies. My personal experience with Groupon is soley from talking with family and friends; I have never seen third party advertising. However, Groupon's competitor, Living Social, is besting Groupon at is own game. Therefore, because Social Living is expanding its advertising and customer base more efficiently than Groupon, Living Social is better poised to become more profitable. Based on these future projects, Groupon can only be seen as a shorting opportunity because it is to lose market share and therefore profits, eventually hitting its stock price. Therefore, you should seriously consider shorting it.

Zynga (ZNGA) is a fresh new tech stock that has a lot of potential to short due to many uncertain internal and external factors. In my opinion, this stock has experienced a run-up akin to the early 2000s tech bubble. I believe you should short this stock because it has followed the same exact pattern as the stocks during the 2000s tech bubble and now has reached its breaking point. The company's most recent earnings report that catapulted it 80% higher in just 6 weeks is based on a $435 million dollar loss. Based on that alone, a company has to be profitable to be sustainable, and in my opinion this loss is a good sign for its stock price to fall. Analysts themselves say this stock is not a reliable growth stock, but a stock “based on social media craze.” It has also recently been downgraded by 4 top analysts because of the social media craze run-up. In my opinion, it sounds like this is a top for the stock. Moreoever, based on the similar past performance of the tech stocks in the early 2000s, I feel shorting this stock will put you in a better position to make money versus going long on this stock.

Netflix (NFLX) is an online movie retailer with little to no hope for a comeback, but you have a greater chance of profit by shorting it. Based on today's price of $109, and its 52 week range of $62 to $304, one might think there is some upside potential in the future. However, in my opinion and backed up by analyst's and data, Netflix is a great shorting opportunity because technology and competition will render it out of business. Analysts have Netflix targeted at $97 within a year's time, already projecting a $15 shorting gain, a more than 10% gain. Also, it's the perfect time to begin shorting the stock because the projected competition is at the precipice of rolling out technology to stream movies through pre-exisiting cable equipment, rendering Netflix itself useless. These circumstances provide investors with the perfect opportunity to maximize profits within a reasonable window of opportunity. Based on these factors, in my opinion, shorting Netflix now gives investors having the perfect timing and chance for profitability.

LinkedIn (LNKD) is a social media job search website that in my opinion has many good reasons to short this stock. Based on its 1 year target estimate of $90, it has no room for growth because today's quote is at its 1 year estimate. Coupled with the recent craze over speculating on social media IPOs, LinkedIn has already seen its value more than halve from $120 to less than $60, over the past 3 to 4 months. Even though this stock is wildly overvalued and has not proven itself with stable, long-term earnings, the stock has rallied with other social media stocks, such as the Facebook IPO, purely because of hype. Therefore, in my opinion, because the stock's price is based mainly on hype and little fundamentals, this stock has even more room to fall in price, because its past has already proven the false reasons for its run-up.

About the author:

Dividend King
I am primarily an investor interested in creating passive income streams through dividends. I focus on finding and analyzing dividend paying stocks, MLPs and REITs that are a good fit for income investors.

I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.

Visit Dividend King's Website


Rating: 4.0/5 (14 votes)

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK