How to Make Money on the Short Side of the Stock Market
- I want to tell you about five of the scariest stocks out there — stocks to avoid at all costs.
The market crashed for good reason — the financial system was on the verge of a Great Depression-type meltdown, and the economy was quickly following.
For technical reasons, and because of the vast amount of liquidity the Federal Reserve and U.S. Treasury has injected into the market, we’ve seen
a huge rally since March. The Street wants to see real growth next year, but it will be disappointed. (See 10
Reasons the Economy Will NOT Recover in 2010).And when the fundamentals catch up — i.e., when the Street starts to evaluate companies based on the assumption that the massive injections of
liquidity are winding down — the five names I’m about to list will be some of the worst stocks to own, because their fundamentals in no way support
their inflated prices.Keep reading for five of the scariest stocks out there.
How to Make Money on the Short Side of the Stock Market
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Scary Stock #1: Palm (PALM)
Palm (PALM) is the unfortunate company that has to go head-to-head
against Apple’s (AAPL) iPhone and Research In Motion’s (RIMM)
BlackBerry, not to mention both companies’ enormously deep pockets. PALM will not win against such stiff competition.Palm continues to lose money and burn cash faster than the Bush and Obama administrations. On Aug. 31, it had $277 million in cash and receivables,
and $522 million in payables and short-term debt, while long-term debt is $389 million. And this is a company that may generate $400 million in revenue
next year, and perhaps $500 million the year after, but no profits!Barring an acquisition by a company dumber than Palm (where are the Chinese companies when you need them?), the stock is worthless.
How to Make Money on the Short Side of the Stock Market
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Scary Stock #2: Open Table (OPEN)
Open Table (OPEN), a company that allows people to make restaurant
reservations online, is a cult stock that’s unspeakably overvalued. Think about it. Restaurants, especially higher-end ones, continue to lose business
as consumers pinch pennies, and OPEN is a pure play on the restaurant business. This non-tech outfit is selling for six times revenue and 100 times
forward earnings based on analyst estimates.Management says it will fuel growth by expanding in Europe, but have you ever been to the typical high-end European restaurant? Fugheddaboudit!
Management and other insiders just dumped a humongous number of shares in a secondary offering, which didn’t raise any money for the company — it
just let investors and managers get liquid.
How to Make Money on the Short Side of the Stock Market
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Scary Stock #3: Blue Nile (NILE)
Blue Nile (NILE) is another cult stock. It’s well managed and a
great brand for those buying jewelry online. The Street sees NILE as a “trading down” winner for people looking to save money who will buy their jewels
online to save money. That may be true to some extent, but you need a credit card to buy online and income to back up the credit card — and Blue
Nile’s core customer isn’t the person who will go to Tiffany (TIF)
while wearing a Hermes scarf.Consensus estimates have NILE with a forward P/E in 2010 of 62. No kidding. The stock right now is range bound and has been driven by the troika
that kills fundamental investors — short squeezes, momentum traders
and the willfully blind.Bottom line: This company (while a great franchise) has a stock that is due to blow up. The only question is when.
How to Make Money on the Short Side of the Stock Market
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Scary Stock #4: First Solar (FSLR)
First Solar (FSLR) is part of the Chinese solar industry — an industry
that’s one big bubble!I would like to provide a fundamental analysis of First Solar, but since it’s a Chinese company, that would require paranormal skills that are found
only in buy-side analysts who do investment banking or hope to do investment banking business in China and the Chinese solar industry. These companies
boast iffy and unreliable accounting data. Orders from suppliers to assemblers are single, double and triple booked — not in their earnings statements,
but in the “insights” provided by analysts.Furthermore, solar sales are being driven by Chinese government largesse; stock prices are being driven by loans from state-owned banks; and how
long do you think the United States and Europe are going to give these companies unfettered access to their markets if China does not devalue? Plus,
the put premiums reflect the contention that the Chinese solar industry is in a big bubble. Stay away!
How to Make Money on the Short Side of the Stock Market
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Scary Stock #5: Wynn Resorts (WYNN)
Wynn Resorts’ (WYNN) Steve Wynn is a guy I really love. He went
from a bingo parlor operator to the world’s most famous and innovative casino operator — all while battling near-blindness from retinitis pigmentosa.
He brought Frank Sinatra, the Mirage, Bellagio and the Wynn to Las Vegas, bought this, sold that and just brought $1.5 billion back home by cashing
in on an IPO for his Macau venture.He is one cool customer, but financial success in stock markets does not mean people are spending more money — in fact, they are spending less.
There will not be much growth in Las Vegas or Macau. In fact, I believe Las Vegas is gong to be seriously impaired for at least several years, and
WYNN is radically overvalued.Most importantly, in the short term, the stock is headed down and just dipped below its exponential six-month moving
average, and is now hovering just above its 50-day moving average. Oh, and it is selling for 100 times earnings.Finally, Mr. Wynn does not have a history of returning cash to investors; rather, he spends it on new hotels and casinos.
How to Make Money on the Short Side of the Stock Market
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Scare Tactics
If you hold any of the stocks mentioned in your portfolio, you should be frightened. These are stocks you should stay far, far away from or, better
yet, you could profit by shorting them through put
options when the market begins to come to its senses.If you’re interested in profiting from these scary stocks, here are a few articles that should help:
- How to Pick the Right Put Option
- 10 Things You MUST Know Before Shorting a Stock
- 5 Rules for Making Big Profits Shorting Stocks
Why You Can’t Afford to Ignore China
There are incredible opportunities in China right now — if you know where to look. China expert Robert Hsu reveals the best industries
and three top companies to invest in for big profits. Read his latest investing guide here.
