Amid the market’s collapse in September, it was no surprise that short-selling stocks had reached a level not seen since March 2009. It was also a huge contrarian indicator to buy stocks.
Since short-selling stocks crested and the market hit a short-term bottom, stocks have rallied, with Europe getting more organized with respect to resolving its debt crisis. In addition, economic news has held up relatively well — or at least not shown signs of collapse.
Now earnings season is in full swing, and so far the news has been positive. Alcoa (NYSE:AA) missed estimates due to a sharp decline in aluminum prices during the third quarter, but the company was adamant that it would meet growth expectations for the remainder of the year. Late Thursday, Google (NASDAQ:GOOG) reported results that blew away revenue and profit estimates.
All the positivity is making investors downright giddy, and when stocks go up, traders that are covering their short positions can add fuel to market gains. The roller coaster ride continues.
However, individual stock fundamentals still matter, and the recent rally has lifted certain stocks that can’t justify their new lofty prices. Those companies with poor financials, weak management, or declining prospects deserve to be sold short. Here my top three candidates:
Research In Motion
This poor company can’t catch a break — and it doesn’t deserve to. Research In Motion (NASDAQ:RIMM), the maker of the BlackBerry, was in the news again this week with word of a major outage in its service. While the incident wasn’t a regular occurrence, it couldn’t have come at a worse time. The company is already struggling to recover from poor management decisions over the last few years, and it doesn’t need any more negative publicity.
Its core product is losing market share. At the same time, the spotlight is back on Apple (NASDAQ:AAPL) with its launch of a new iPhone. Management needs to be focused on creating value with new products and innovation, not service outages.
Since the stock bottomed, shares of RIM have rallied nicely — they’re up more than 20% since the end of September. That is a rally you can sell into. The die-hard BlackBerry enthusiasts are fighting hard for the beloved device, but the writing is on the wall for this company. Its primary advantage of mobile email delivery on a handheld device has been usurped by the smartphone.
RIM isn’t that different than Eastman Kodak (NYSE:EK) in missing the evolution from film to digital. Kodak is further along in the death march, but Research In Motion will soon be at the same place. This is an easy stock to short and even more so with recent gains in share price.