I have written a lot of short-selling articles over the last few weeks primarily because the market was overvalued, and I was expecting a correction in the coming months. While I wasn’t expecting the correction to start so soon in 2016, my short calls have been profitable.
I have always centered my articles on shorting overvalued companies, and many of those stocks have lost considerable value. However, despite the correction, many of those stocks are overvalued, and investors should not make the mistake of buying them on the dip. One such stock is Fitbit (FIT, Financial).
I recommended shorting Fitbit exactly a month ago, and my call has resulted in over 33% profit. I cited increasing competition and insider selling as the primary reasons for my short call. The last few days have not been good for momentum stocks, and Fitbit is now trading at under $19, down from over $30 last month.
After witnessing over 30% profit, investors should close their short positions and lock in the gains. However, I still don’t think Fitbit is undervalued and would advise against buying the dip.
The primary reason investors should continue to avoid Fitbit is the increasing competition. Fitbit launched its new watch called Blaze earlier this month and priced it for $200. The watch is $350 cheaper than the least expensive Apple (AAPL, Financial) Watch, and this shows that the increasing competition is finally taking its toll on Fitbit. The company is sacrificing profit margin to prevent the loss of market share. However, this strategy will not work in the long term as the competition is increasing consistently.
The likes of Apple, Xiaomi and Garmin (GRMN, Financial) are already threatening Fitbit, and the impending arrival of Under Armour (UA, Financial) can put further downward pressure on Fitbit’s stock. All these companies make better products than Fitbit, and the company’s strategy of reducing price will probably not work. Investors seem to agree as Fitbit’s shares plunged more than 10% when the company launched the Blaze watch, and the company’s downward trend can be expected to continue.
Conclusion
Fitbit has lost more than 30% in just a month, but the stock is still not a buy. Investors are advised to take their profits off the table by covering their short positions. However, that doesn’t mean I am ruling out more downside for Fitbit. The threat of increasing competition will likely weigh on Fitbit’s margin going forward, and I will not be surprised if the stock plunges to under $15 in the coming months. Given the ongoing market correction, investors should stay away from momentum stocks like Fitbit.
