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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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  • Harley-Davidson (HOG)
  • Netflix (NFLX)
  • Tesla Motors (TSLA)
  • Michael Kors (KORS)
  • Kinder Morgan Energy Partners (KMP)

Last year, I wrote about “Harley-Davidson’s Flat Tire: Demographics,” and I share the managers’ bearish outlook for the company. And while I admire Netflix as a company, I have long been skeptical of the sustainability of its growth and the stratospheric valuation of NFLX stock.

Tesla Motors — which was Kyle Woodley’s pick in InvestorPlace’s 10 Best Stocks for 2014 contest (and the current leader by a wide margin) — is a risky short given its momentum, and one that I probably wouldn’t have the stomach to execute. The same goes for upstart fashion designer Michael Kors, which has taken the aspirational luxury market by storm in recent years. However, both stocks are significantly more expensive than the broader market.

Kinder Morgan Energy Partners is an interesting case. Hedgeye, a risk management and research firm, made a stir last year by calling KMP a “house of cards,” arguing that the company was engaging in aggressive accounting related to maintenance and capital expenditure spending. While I believe this is probably true, at least to an extent, I would hesitate to short a stock with heavy insider buying. As I wrote recently, Richard Kinder has put $60 million of his own money into KMP’s general partner, Kinder Morgan Inc. (KMI).

I’ll wrap this up with some general short selling advice from Del Vecchio and co-author Tom Jacobs from What’s Behind the Numbers.

First, don’t be too eager to jump into a short position. As Del Vecchio and Jacobs point out, “You make as much money shorting a stock that falls from $70 to $5 (93%) as one that falls from $100 to $5 (95%).” That’s just a way of saying that getting into a trade too early (and shorting a stock that goes up) will turn a would-be profitable short into a frustrating loss.

Second, watch out for crowded trades. Don’t start short selling a stock if the short interest is too high as a percentage of the float. This puts you at risk of being short-squeezed as your fellow sellers all scramble to buy at the same time and send the share price to the moon. One easy way to conceptualize this is “days to cover,” which is the number of shares sold short divided by the average daily trading volume. The higher this number, the more at risk you are to a short squeeze. There are no hard and fast rules here, but as a general rule I would say it’s best to keep the number below seven to 10 days for an initial position.”

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long KMI. Check out his new premium service, Macro Trend Investor, which includes a free copy of his e-book, The New Megatrend Investor: The Ultimate Buy-and-Hold Strategy That Will Make You Rich.

Article printed from InvestorPlace Media,

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