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10 Potential Short Selling Candidates for 2014

Investors should heed some of of HDGE manager Del Vecchio's most bearish picks

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The life of a short selling professional can be lonely. When you celebrate a successful trade, you do it largely in private because, more often than not, everyone you know lost money.

short-sellingAnd when you lose? Well … don’t expect much in the way of sympathy.

Given that you are constantly going against both popular opinion and the normal upward bias of the stock market, you have to be confident in your research when you go short selling in earnest. But given that, in the words of John Maynard Keynes, the market can remain irrational longer than you can remain solvent, you also have to have disciplined risk management in place and be willing to cut your losses early.

This is a long way of saying that short sellers are a special breed.

John Del Vecchio, co-manager of the Ranger Equity Bear ETF (HDGE) — a dedicated short selling fund — and manager of the Forensic Accounting ETF (FLAG), is one of those special breeds. I reviewed Del Vecchio’s book, What’s Behind the Numbers, about a year ago, and I consider it required reading for any aspiring short seller.

I can, however, summarize the book in one short paragraph:

A sky-high valuation is not sufficient justification to short a stock, as expensive stocks often have a way of getting more expensive and gimmicky fad stocks can stay trendy longer than you think. You need a catalyst, and the signs for Del Vecchio that the jig is up are aggressive revenue recognition and inventory management. Quoting What’s Behind the Numbers, “The time to sell or short is not when you think a business model can’t survive. The time is when the numbers suggest that management is covering up poor performance.”

With the market off to a slow start in 2014 and valuations looking a little stretched, you might be itching to try your luck at short selling. Let’s take a peek at what Del Vecchio and co-manager Brad Lamensdorf are shorting to find some promising candidates.

Top 5 Short Positions as of 1/20/2014

Stock Ticker % of Portfolio
International Business Machines IBM -5.55%
CenturyLink CTL -5.22%
Fastenal FAST -3.6%
Caterpillar CAT -3.33%
Tempur Sealy International TPX -3.29%

The largest short position in the HDGE portfolio is one of the bluest of blue-chip stocks, IBM (IBM). It takes a certain amount of chutzpah to start short selling IBM given that it is one of Warren Buffett’s largest holdings, but Big Blue did have a losing year in the market in 2013 —  a year in which the S&P 500 returned 32% (including dividends).

Next on the list are telecom operator CenturyLink (CTL), industrial supplier Fastenal (FAST) and heavy-equipment maker Caterpillar (CAT), all of which have struggled over the past year. Caterpillar in particular has faced a double whammy of lower demand from emerging markets and lower commodity prices, which have discouraged new projects.

Rounding out the top five is Tempur Sealy International (TPX), which performed surprisingly well in 2013. Nearly two years ago, I wrote about the demographic trends driving Tempur’s business, suggesting that over the long term, the business faced enormous headwinds. In the immediate near term, however, it will be the family formation of Generation Y (and the resulting need for new furniture) that makes or breaks the company.

Other shorts of note?

Article printed from InvestorPlace Media,

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