Stick With Shorts Under the Radar

 

 

 

 

Friday, November 21, 2014 Stick With Shorts Under the Radar   by Jamie Dlugosch   It takes a lot of courage to be short this market.   Stocks are roaring higher once again.   Every time shorts appear to be victorious, the market quickly reverses and a short squeeze commences.   Quick short selling lesson No. 1 from noted short seller Doug Kass might help you if you are short stocks and want to avoid a squeeze.   Specifically Kass doesn't like to short stocks that are heavily in the news and thus already attracting a ton of short interest.     FURTHER READING CIA Insider's Haunting Message: "2nd Great Depression is Imminent"   The CIA's Financial Threat and Asymmetric Warfare Advisor has come forward to warn of an unavoidable $100 trillion American meltdown. In this frightening interview he reveals the alarming evidence he and his colleagues have uncovered that proves it is at our doorstep. Click here for his investigation.     That may seem obvious, but when a stock has huge short interest and good news appears, the shorts can lose big time.   Kass prefers risk management even when short and that means avoiding stocks in the limelight.   The opposite can be said of Bill Ackman and his loudly proclaimed short of Herbalife (NYSE: HLF).   Kass thinks Ackman made a huge mistake being so vocal about his position on Herbalife.   Even if the short has a sound basis and reasoning, going so public with the trade virtually assured that Herbalife short interest would soar.   Any good news from Herbalife has resulted in more pain than pleasure, even though at the moment Ackman is enjoying a stock that has been falling of late.   Still, Ackman could indeed be in big trouble if Herbalife is given just a slap on the wrist as opposed to the death sentence that the shorts are expecting.   If so, this trade is going to go the opposite way.   What Kass likes to short are businesses with not nearly as much short exposure. By that he says that a stock with 7% of the float short or more is to be avoided.   Typically that will mean shorting a low-growth stock that has hit the wall or a stock that has other looming issues that could change its prospects.   That makes sense to me.   In essence, Kass is taking a fundamental approach to his shorts. If valuations become excessive relative to growth and there is little short interest, you can bet that the stock will be examined closely by Kass as a potential short trade.   One example of that might be Medtronic (NYSE: MDT).   Shares of the medical device company have rallied recently thanks to the midterm election and the possibility of a repeal of the medical device tax that's part of the health-care law.   In addition, Medtronic released earnings results that merely met expectations. The lack of bad news resulted in euphoric bulls pushing shares higher, but why?   There is nothing to get excited about here. Profit growth at Medtronic is expected to be minimal from the current fiscal year ending April 30, 2015, to the next. At current prices, shares trade for 18 times current fiscal year estimated earnings.   Short interest is just above the 7% threshold that Kass likes to see, but given the premium valuation there are some really good reasons to be short this stock.   Just don't go tell it to the world. Some things are just better left unsaid.   Medtronic is vulnerable to a price decline, not the opposite.   Jamie Dlugosch Editor Investor Research Institute   To Read More From Investor Research Institute Click Here
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