There are always a handful of big momentum plays in the market. Money shifts in and out of them, although the duration of a stock’s popularity can wax and wane considerably. Using a combination of intuition, technical analysis, and watching how money flows into momentum stocks, you can learn when to go short selling. However, it also helps if the underlying company itself has long-term questions.
Short selling is something I rarely engage in, and it’s not something most investors want to touch. Yet short selling can be incredibly lucrative if you choose the proper strategies, and I learned a lot from a relatively well-known short seller during a recent lunch meet-up. This is a guy who made his fortune short selling I’m passing it on to you so you can make money.
Here’s a quick rundown of some of the advice he had to offer.
Mr. Short just went short selling again on Tesla (TSLA). Why? The company cannot sell six-figure cars no matter how great they are. Nor can they drop into a lower price point, where they’ll compete with the best-selling cars from all the major manufacturers. The hype vastly exceeds what Tesla can do in the long run.
What about a company that truly looks dead, like Sears (SHLD)? He pointed out that, yes, the company doesn’t stand a chance. The real estate isn’t worth much, but the Craftsman and Kenmore brands are. Plus, the financial engineering that’s keeping the company alive can continue for a while longer. It’s therefore not the opportunity for short selling I thought it would be.
How about my favorite target, Best Buy (BBY)? “They pulled a rabbit out of the hat. There’s no real business there, except as a showroom. But then they invited Samsung (SSNLF) to set up a store-within-a-store, with free technical support like the genius bar at Apple (AAPL). They’ve done that with several brands, all of which pay them rent. So now they have a business. Wouldn’t surprise me if Amazon (AMZN) buys them out and now there are Amazon showrooms all over the country.”
How about Chipotle Mexican Grill (CMG)? Mr. Short wouldn’t short that stock. He thinks the food is great, the concept is simple, the stores are all cookie-cutter, and there’s nothing quite like it out there. The balance sheet is in great shape, and it continues to grow. And they haven’t even touched China yet! No short selling here.
And what about stocks with high short interest? Are all of them dangerous to short? “Some are outliers. If it’s truly a possible zero, it’s not as much of an issue.”
In the case of some of these stocks, it’s a case of having a particular expertise, knowing how that specific business operates, what its vulnerabilities are, and if those flanks are exposed. It’s a corollary to Peter Lynch telling you to invest in what you know. Sometimes, what you know means being able to short what nobody else sees.
Lawrence Meyers owns shares of Apple and Amazon.
As of this writing, Lawrence Meyers was long AAPL and AMZN. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.
