Writing about downside scenarios is not popular, but it is important to consider especially when stocks are near all-time highs. The idea of shorting stocks is combative by nature, and this is especially true for our stocks in this article. They are part of the beloved herd of equities that have led the market up and out of the March crash. These are specific trades — not investment ideas — because all three have strong fan bases.
The reason I consider these to be three stocks to short near the highs is not a knock against their thesis. In fact, I’ve recently written about upside potential in them. I like them, but I am not a fan of the price action.
I rarely condone betting against the upside potential of momentum stocks. But in this case, the signs are technical tells on the charts, and extraordinary high expectations of future fundamentals that are just not likely the materialize. These are emotional tickers that we will be discussing, but investors should keep an open mind and leave emotions out of it as much as possible. For the two biotech companies, it will be a challenge because they are in a battle against the novel coronavirus.
Keep in mind that by suggesting that their stocks are going to fall doesn’t mean I am betting against people’s health. They can still find the vaccines, but my bet against is against the speculators who expect a high level of profit from them. This is not likely going to be the case and the bet today on all three counts is against the expectations of what is already in the stock prices.
Thus, these are the three companies in question:
So, with all of that in mind, let’s dive in!
Stocks to Short: Zoom Video (ZM)
Let’s start with Zoom, which is a beloved stock that just reported earnings and crushed them. The growth rate has been exponential, but so has the stock price.
Currently, it has 167 years worth of full year sales built into it. That is a lot of future upside hope to expect with much confidence. I respect what the company has accomplished in such a short period of time. In fact, they host 208,333 people in Zoom meetings every minute. These are not quite Netflix (NASDAQ:NFLX) numbers, but they are getting there.
In spite of this, I have to question the odds of upside expectations materializing. The platform gained popularity mainly because everyone was stuck at home and they were forced to meet in cyberspace. Some people call it luck, but I say Zoom made their own luck by building a nice platform that grabbed all the attention. There are alternatives, yet we all speak of Zoom to the point it is almost a verb or the generic term for e-meet.
When the management reported earnings, they proved that this is indeed a growth stock. Therefore, I don’t expect it to be cheap — thus, I don’t mind the extremely high price-earnings ratio (P/E). But at some point, I have to compare it to other hyper-growth stocks like Shopify (NYSE:SHOP) or Amazon (NASDAQ:AMZN). And at this point its price-to-sales is much higher than that of both Shopify and Amazon. Even the PEG ratio is three times bigger than Amazon.
Therefore, investors are giving it too much credit. Besides, there are also the external problems brewing in the markets overnight. The whole thing is under pressure, and ZM stock cannot rally alone.
Biotech stocks are always binary and move in big bursts on headlines. Novavax is not an exception, and this year it has moved at lightning speeds. Case in point, on Wednesday — in a matter of hours — it rallied more than 15%. Then, it fell another eight. Clearly, it is not for the faint of heart and it is a speculative trade.
The current price is almost entirely set on the premise that the scientists will prevail. Consequently, owning it is a binary trade and one that I don’t average down on when price is falling.
Technically, the bulls are no longer in control of it like they were into August. Even though it is now 30% below the highs, it doesn’t mean that it cannot fall further from here. This week, the action has been favorable to the buyers, but they ran into a pivot zone. The area around $135 per share is not going to be easy to overcome, at least not at the first try.
The risk is that NVAX stock fades one more time and retest the recent loss. Those must hold otherwise they could trigger a major bearish pattern. That said, my call here is cautionary for those starting to get long Novavax now. This is not an obvious place to start longs while it battles this resistance zone above. The onus is on the bulls to maintain the higher-low trend that they started on Sept. 9, otherwise the stock can easily fall more than 20%. If that happens, it could open another can of technical worms.
Those long to stock with profits should book some if not all. Everyone promises that the vaccines are coming, but hardly anyone is discussing the possibility that they won’t. After all, we still have never had a vaccine for any coronavirus. Moreover, Novavax has never had a vaccine come to market. This is a first on two counts, so it is fraught with risk. It is important to remember that NVAX stock had to reverse split so it stayed listed on the exchange. The spike from the vaccine headlines completely saved it.
Stocks to Short: Moderna (MRNA)
If there is a stock that can give Novavax a run for its money for bring wild it is Moderna. From the March lows, it rallied 440%. It did this in two waves, one was 400% followed by a 40% correction. Then, it rallied another 100% that also ended in a 40% correction. Luckily for the last week or so, the bulls have been in charge and MRNA stock rallied almost 20%.
If you traded this stock, you needed a neck brace and some Dramamine for the nausea. While each of the biotech companies has their own twist on the Covid-19 solution, technically these two are in the same boat. Mpderna is also enjoying a nice rally, bouncing off support levels. But they are also both running into resistance so they are likely to fade. Here, too, there is the risk of losing support to trigger a two-step bearish pattern.
Overall, the MRNA stock neckline is near $54 per share. There are support levels around $46 and $37 — but if the sentiment flips on this one, the buyers will disappear. I consider this also a speculative bet on future results. Therefore, I do not average down to manage my risk. Moderna had $60 million in full year revenue and sports a $26 billion market cap. The extreme valuation puts the investors at extreme risk. And since this is a humanitarian crisis, governments are not going to let vaccine companies rake in the profits for years down the line. The world is in crisis, and nobody wants price gouging to take advantage of the desperate.
There Are Extrinsic Risks
The whole market is overpriced at this point and full of stocks to short. We are at the mercy of the government’s bailouts and handouts. There is a definite dislocation between the depression that is exists on Main Street and the boom that is in Wall Street. Those two cannot coexist too long without reverting to the mean.
Therefore, I don’t anticipate a full-blown crash in the market, but I do see the potential for downside especially if the election goes the wrong way. Wall Street does not like change, especially in the White House. We are also about to start another earning season, so uncertainty and volatility are here to stay. Therefore, caution is more than warranted regardless of single-stock conviction.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.