I’ve done it before, but someone asked me to provide a list of shorts. What would you do to start out in finding shorts? I have some generic ideas, like look for companies with excess debt, trading at high PEG ratio etc, but thought i’d ask the forum what they thought?
‘Don’t do what johnny don’t does’ - enter a crowded short position that’s also a takeover target, ala Volkswagon! Seriously though, keep an eye on short interest, those squeezes can be nasty if you don’t know what you’re doing.
In bloomberg: -Stocks within 5 or 10% of 52 wk high -Stocks with high financial leverage -Stocks with insider selling (especially selling by more than one insider) From there, check on things like the usual - p/cf, p/s, p/b, whatever else - and add them and tweak them. You really can’t go through a list of more than 100 candidates by hand in a short period, so add or modify criteria based on what you need to try and get your 100. Also, someone who has more experience shorting should chime in here but there’s a big difference between: shorting a stock that you think is about to peak and shorting a stock that has declined, but you think is about to go lower. i.e. some people are looking for pets.com pre-crash: something that the market has badly mispriced, and are still excited about. Other people are looking for Lehman brothers in like, July 2009 - something that’s come down far, but you think is about to get even worse.
A lot of folks lost their shirts trying to short NFLX earlier this year @ $100. It’s now @ $185. You may think the high P/E high PEG names are overbought but the market may think otherwise. I still think the for-profit education industry could take another hit. This is largely dependent upon what happens in Washington with regards to pending legislation that could disrupt federal aid funding to these schools. There are different ways to come up with your “short thesis”. I’ve always been a top-down guy so I like to start with the macro variables that may affect certain sectors/industries in the short-term future. I also like to look for companies that are in endangered industries. i.e. blockbuster and the bricks and mortar movie rental business or the Kodaks of the world that have failed to adapt to an almost non-film world. It’s almost common sense, but the Peter Lynch method is to buy stocks of companies that you like and whose products you purchase everyday. Take the opposite side of that and short companies that you despise, have crappy products, customer service, management, etc… i.e. I hate Sears. Their merchandise blows, website is a wreck, auto center is a joke, and you can’t find a helpful person anywhere in the store. Take a look under the hood at the financial statements and there is probably a reason for this. I’m not a big proponent of shorting companies purely based on their bottom-up fundamentals. Regardless of the quality of the company you always run this risk of catching a junk rally. I don’t like the idea of ever owing someone money for a bad trade or investment. If I do want to short something I use long-dated puts.
You guys might have seen this. Article discussing shorting Netflix (well written) http://seekingalpha.com/article/242320-whitney-tilson-why-we-re-short-netflix And the CEO’s response (very classy IMO) http://seekingalpha.com/article/242653-netflix-ceo-reed-hastings-responds-to-whitney-tilson-cover-your-short-position-now?source=hp_mostpopular
You can screen for short candidates, but I generally think that you shouldn’t actually enter the position until the stock appears to have stopped going up, or better yet, started going down. People can only hold out on the short side so long before they have to cover, and the market can stay irrational logner than you can stay sovlent. People giving up on the short side leads to short squeezes. Remember that with shorting, you have to be more convinced of your analysis than on the long side, because the market does trend upwards, so you have the wind in your face. Add to that the fact that you have to pay interest, dividends, have additional margin risks, and the fact that your short exposures get larger as they move against you (on the long side, they get smaller), and your burden of proof to take the short side is just higher to justify a position. I have no proof of this, but I think that this is why it’s so tricky to short. It’s not that one can’t find overpriced stocks, it’s that it’s so easy to underestimate the additional risks and so people end up with exposures that are too large for the expected return, and they don’t realize it. Just my $0.02
I’ve done lots of short selling but it was always hedged vs what I thought was the better long…or in some cases I had an edge in the structure of the position, e.g. I was extra short capital in a coal pair (i think it was cnx-mee, can’t remember exactly) right before the commodity bubble popped as I felt coal stocks in particular were retarded over-valued (at the time these were trading near $90 a share). Despite that I was still more or less hedged, and what chadwich says; paying dividends on short positions really suck the big one! Single-siding shorting…probably better left to the crooks, I mean insiders :)…maybe just sell some calls?
spreads Wrote: ------------------------------------------------------- > I’ve done lots of short selling but it was always > hedged vs what I thought was the better long…or > in some cases I had an edge in the structure of > the position, e.g. I was extra short capital in a > coal pair (i think it was cnx-mee, can’t remember > exactly) right before the commodity bubble popped > as I felt coal stocks in particular were retarded > over-valued (at the time these were trading near > $90 a share). Despite that I was still more or > less hedged, and what chadwich says; paying > dividends on short positions really suck the big > one! > Single-siding shorting…probably better left to > the crooks, I mean insiders :)…maybe just sell > some calls? Naked short calls? People over leverage themselves when they start selling naked calls. One unexpected announcement and you’ve just lost everything including your family if you had one.
dont fall into a “value trap”…Salesforce (Tickr:CRM) being a case in point… very high multiples. but has been going up consistently.
Well said BChadwick. There is much truth to the saying “The market can trend longer than you can stay solvent.” Personally I like to short names that I know and understand the dynamics of the industry and then confirm my thesis with the fundamentals and competitor analysis. It is also much more important to adhere to strict stop loss rules and keeping the thesis fresh. Unlike the long side where you can establish a position and review it on a reporting frequency basis it is critical to understand all the drivers of the valuation on a constant basis.
ManMythLegend Wrote: ------------------------------------------------------- > spreads Wrote: > -------------------------------------------------- > ----- > > I’ve done lots of short selling but it was > always > > hedged vs what I thought was the better > long…or > > in some cases I had an edge in the structure of > > the position, e.g. I was extra short capital in > a > > coal pair (i think it was cnx-mee, can’t > remember > > exactly) right before the commodity bubble > popped > > as I felt coal stocks in particular were > retarded > > over-valued (at the time these were trading > near > > $90 a share). Despite that I was still more or > > less hedged, and what chadwich says; paying > > dividends on short positions really suck the > big > > one! > > Single-siding shorting…probably better left > to > > the crooks, I mean insiders :)…maybe just > sell > > some calls? > > Naked short calls? People over leverage > themselves when they start selling naked calls. > One unexpected announcement and you’ve just lost > everything including your family if you had one. I think I made this comment in the second post of this thread regarding price shocks, I know a guy that was short 1k shares of POT (holding into BHP). So leverage is relative, calls or shares…
You can try this and test too if you like, High short interest + rising short interest + high open interest put/call ratio + more spikes in recent volume put/call ratios on positive vs negative side with reference as 1 + steady growth in open interest put/call ratio + high leverage + preferably low valuation ratios + declining volumes + low correlation with sector + preferably consistently (accelerating) negative momentum on an average for past 2-4 months + much above next support and reasonably below previous resistance level + no evidence of strong long term trend This can get you started for some names which can be good short, grill them more on fundamentals as usual! Though this is just one time, at end your universe will come out to be very limited so you can’t use it on regular basis, once in a quarter may be.