Tag Archives: short ideas

Shorting Stocks Will Outperform The Market

On December 1st, with a short-sell report I wrote on L Brands (LB) and published by Seeking Alpha that I used to launch the Short Seller’s Journal, I explained why L Brands was a great short idea at $96.  Here was my rationale:

L Brands (NYSE:LB) is a specialty retailer that operates the Victoria Secret and Bath & Body Works chains. It also operates La Senza, a Canada-­based intimate apparel retail concept, and Henri Bendel, a high­end accessory products brand. The stock has run from under $7 in March 2009 to its current (November 27) price of $96.68. In that time period, it has outperformed the S&P 500 by over 350%. But, in the context of rapidly slowing revenue growth, declining operating margins, increasing financial leverage and a likely pullback in consumer spending, LB’s stock is extremely overvalued relative to its underlying fundamentals and relative to its peers. In my view, LB represents a compelling opportunity to short the highly overvalued stock of a company operating in a business sector facing significant economic headwinds.

Here’s how the LB short performed from 12/1/15 to present, after reporting an pre-arranged “beat” of Wall St’s earnings estimates (the big game that has developed over the years is for management to “wink wink” walk Wall Street’s robotic analysts’ quarterly estimates down to a level below the actual numbers the company plans to report) but was forced to warn about the rest of the year:

As you can see, shorting LB on December 1, 2015 has significantly outperformed the XRT retailer ETF. It has also outperformed going long the S&P 500 by a factor of nearly 400%. Nothwithstanding what to me was the onset of a consumer spending recession and an obviously overvalued stock market, LB at the time was overvalued relative to both the stock market and the retail stock sector:

The traits specific to LB, and that is based on information that is freely available to anyone who is motivated to do the research, included:   a stock priced for perfection, aggressive debt issuance to finance huge share repurchases, heavy insider dumping of shares into the share repurchases and a stock valuation far in excess of industry peers.

Despite the inexorable grind higher in the Dow, SPX and Nasdaq indices, hundreds of stocks are either at 52-week lows are getting ready to embark on a “price-seeking” mission to find their 52-week lows.  Just ask the Dick’s Sporting Goods (DKS) or Advance Autoparts (AAP) bulls.  LB, DKS and AAP are examples of stocks will get cut in half at least two more times in the next 12-18 months.

The Short Seller Journal was launched with the goal to expose the truth about the stock market and the truth about the manipulated economic and earnings reports fabricated with the intent to support the most over-valued stock valuations in history and, more important, to use those truths to find short-sell ideas that will outperform long strategies. LB is an example of the types of ideas uncovered by the Short Seller’s Journal.

You can learn about this newsletter here:  Short Seller’s Journal information.  There’s very few, if any, newsletters that focus on shorting the market.  The best time to invest in a market theme is when the rest of the market is doing the opposite.  As a testament the quality of the Short Seller’s Journal, the subscriber turnover rate is remarkably low. There’s no minimum required subscription period and subscribers receive a 50% discount to the Mining Stock Journal.

 

Chipotle ($CMG): Boom Goes The Dynamite – Redux

And once again Chipotle ($CMG) is in the news for business operations negligence.  Where the hell is the local Department of Health?  E-coli, customer credit card hacks, novovirus and now rats falling from ceiling – Are You Sure That’s Pork?.   As the tried and true adage declares, “where there’s smoke…” – Short Seller Journal subscribers have been short CMG since 5/7 at $475 – it’s now down $110 in 10 weeks and still trading at 113 p/e…

I stopped eating at Chipotle the second I heard about the e-coli thing. Used to grab dinner there at least once a week. Have not been back. Along the way I’ve avoided the credit card hack to their payment system that surface a few months ago. Now it looks like there’s another viral outbreak at Chipotle of some sort: Virginia Chipotle Closed.

I presented the idea of shorting CMG in the Short Seller’s Journal in the May 7th issue:

This was my rationale:

“I personally used to eat at Chipotle once a week before the e-coli problem. I have not been back since then. This is probably not he last we’ll hear of issues like at CMG.  After the most recent unjustified bounce in the stock up to $475, CMG still sells at a 147 p/e. This is an insane p/e. With restaurant revenues declining across the industry, extremely overvalued stocks like CMG are vulnerable to big cliff-dives. You can see in the graph above that the stock appears to rolling again for another trip below its moving averages and under $400, at least. This is confirmed by the RSI and MACD indicators.

Wall St. was gushing over CMG’s Q1 2017 performance as it exceeded expectations with revenues up 28% vs. Q1 2016 and net income $46 million vs a loss in 2016. But don’t forget that Chipotle’s Q1 2016 was hammered by the e-coli scare. The more appropriate analysis is to look at Q1 2017 vs. Q1 2015.

It’s an entirely different story if you compare Q1 2017 to Q1 2015, where Q1 2015 was on the books before the e-coli problem. Revenues in Q1 2017 were $1.07 billion vs. $1.09 billion in Q1 2015. Net income in Q1 2017 was $46 million, or $1.60 vs $122 million in Q1 2015, or $3.98/share. If we consider Q1 2017 and Q1 2015 to be more of an “apples to apples” comparison, Q1 2017 was not good. Furthermore, CMG had 2,291 stores open at the end of Q1 2017 vs. 1,831 at the end of Q1 2015. Looked at on a revenues per store basis, Q1 2017 was a total failure vs. Q1 2015. But Wall St and company management will not discuss this type of comparison and the morons buying the stock will not look for it.”

In addition to presenting the idea and the fundamental rationale, I suggested a couple strategies for playing the down-side, including using January 2018 puts.  Than January 2018 $350’s have been a home run.  By the way, CMG is still insanely overvalued.

Several ideas have been working since last August and have been working really well since January.  This is because beneath the marquee indices, many stocks are at 52-week or all-time lows.  You can check more about how this service works here:  Short Seller’s Journal information.  There’s no minimum monthly term requirement but the churn rate to this SSJ is surprisingly low.

A Stock Market Crash: A Matter Of “When,” Not “If”

Given group-think and the determination of policy makers to do ‘whatever it takes’ to prevent the next market ‘crash,’ we think that the low-volatility levitation magic act of stocks and bonds will exist until the disenchanting moment when it does not. And then all hell will break loose, a lamentable scenario that will nevertheless present opportunities that are likely to be both extraordinary and ephemeral.  –  Highly regarded hedge fund manager, Paul Singer, in his latest investor newsletter

Singer has apparently has unloaded $5 billion worth of stock, which is 15% of his funds management.

Anyone happen to notice that several market commentators have argued that Bitcoin is  a bubble but the same stock “experts” look the other way as the U.S. stock market becomes more overvalued by the day vs. the deteriorating underlying fundamentals? Bitcoin going “parabolic” triggers alarm bells but it’s okay if the stock price of AMZN is hurtling toward parity with the price of one ounce of gold. Tesla burns a billion per year in cash. It sold 76,000 cars last year vs. 10 million worldwide for General Motors. Yet Tesla’s market cap is $51.7 billion vs. $48.8 billion for GM.

This insanity is the surest sign that the stock market bubble is getting ready to pop. If you read between the lines of the the comments from certain Wall Street analysts, the only justification for current valuations is “Central Bank liquidity” and “Fed support of asset values.” This is the most dangerous stage of a market top because it draws in retail “mom & pop” investors who can’t stop themselves from missing out on the next “sure thing.” There will be millions of people who are permanently damaged financially when the Fed loses control of this market. Or, as legendary “vulture” investor Asher Edelman stated on CNBC, “I don’t want to be in the market because I don’t know when the plug is going to be pulled.”

A friend/colleague of mine is a point and figure chart aficionado. He sent me an email on Thursday in which he said even with the five horsemen (FANGs + AAPL) and the SPX and Dow up today (and the SPX setting a new all-time high), the bullish percent index (BPI) of the NYSE is negative which means there are more stocks generating a point and figure sell signal than a buy signal. This has been fairly consistent over the past couple of weeks. (Note: the bullish percent index is a breadth indicator based on the number of stocks on point & figure buy signals). When the BPI is negative over an extended period of time, it reflects the fact that a lot more stocks in the NYSE are trending lower than are trending higher. When a declining number of stocks are participating in the move higher of a stock index, it is a bearish signal.

As my friend says, “in reality this will continue until it doesn’t.” He goes on to say: ” what this shows me is that at this time it’s much better to be strategically short than broadly short. This will change too at some point…”

Picking out strategic shorts has been the focus of the Short Seller’s Journal. Not all of the ideas have worked and a couple back-fired – in defiance of the company’s underlying fundamentals – but many ideas are well below the price at which they were presented either the first time or presented again thereafter. One idea that has declined 39% (declined $42) since August 2016 is Ralph Lauren, which was presented on August 14, 2016 at $108.19. It closed Friday at $66.11, down 41 cents on a day when the SPX hit another all-time high. RL has closed lower on 12 of the last 13 days.

One subscriber emailed me earlier this week to let me know he had shorted 200 shares at $108 and covered 100 of it this week. He’s hanging on to the other 100 share short. I mentioned to him that my 12-18 month target was $50 and that he should hold the other 100 short at least until August because it’s only going to get worse for the consumer and retailers.

Currently there’s a a large percentage of stocks trading below their 50 and 200 day moving averages.  Many stocks are close or at 52-week lows.  Some stocks, like Sears Holdings (SHLD) are no-brainer shorts.  Sears is going to file for bankruptcy – it’s down 32% from April 2nd, when it was presented as a short idea in the Short Seller’s Journal.  Similar to the probability of a stock market crash, it’s  a matter of “when,” not “if.”