Short Selling in 2015: Three Companies to Target

We may still be in a bull market, but the ground is becoming more fertile for short selling.

You see, the bull market is aging. It will be closing in on its sixth birthday in March. And at some point, the market is going to catch on as to why the stocks have been surging so high for so long.

Markets - if not the whole global economy - are in for a rude awakening. With the United States just getting off its money-printing binge, the Bank of Japan accelerating its own program, and the European Central Bank likely posturing for quantitative easing sometime this year, the market rallies can't be sustained. Something has to give.

"Central banks just print money - there's no backing," said Money Morning Capital Wave Strategist Shah Gilani. "The backing they have is essentially the good will and faith of the countries that supposedly back them. If those countries falter, then who's backing the central banks? The money they print is worthless."

At some point, investors aren't going to have the same trust in the central banks that they've had through the duration of this bull market. For Gilani, there's one very profitable way to play an impending market decline.

"Short what you can - things are going to go down."

Short selling is a bet against the market. A short seller will borrow shares from a broker and sell them at the current market price. If the price goes down, the short seller will buy back those shares at a discount, and return them to the broker. The difference between the price the short seller initially sold the shares at, and the price they paid to buy them back, will be their profit.

Gilani weighed in on some stocks ready for a dive last week on FOX Business' "Varney & Co."

Here are three stocks short sellers like right now...

Short Selling Candidate No. 1: Tesla Motors (Nasdaq: TSLA)

Tesla stock surged ahead as much as 90% in 2014, topping out in September at $286.04. But since then, it's been down more than 30%. It's a volatile stock.

"There's just no reason to buy this stock right now," Gilani said. "It doesn't yield me anything, it doesn't provide any income to me, and it frankly doesn't make any money."

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Gilani likes the cars - and the business. But there are some real short opportunities for this overheated stock.

More short sellers are catching on to TSLA's troubles at this point. According to FinViz.com, the current short float on Tesla stock right now is a lofty 24.4%.

This often makes a stock vulnerable to a short squeeze. That is, any upward price moves could force massive short covering, giving the stock a nice surge.

But Gilani isn't too worried about that.

"It's a speculative stock, it's been a darling, but its run is over," Gilani said. If you short Tesla stock now, Gilani said you could get ahead of a 50% correction.

Short Selling Candidate No. 2: Amazon.com Inc. (Nasdaq: AMZN)

Amazon stock is already down 6% this year, falling below $300. From its peak in Jan. 2014, it's down 27.6%, and it still has a ways to go if you'd like to short Amazon stock.

"I think there's no reason that smart investors would want to own this stock. It doesn't provide any yield, it doesn't offer anything," Gilani said. "Here is a company that has a $136 billion market capitalization, produces $85 billion in revenue, and loses money. There's just no reason for me to own this stock."

"I think this one has got a big drop ahead of it," Gilani said. Another 100 points isn't out of the question.

Short Selling Candidate No. 3: Netflix Inc. (Nasdaq: NFLX)

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If you can only pick one of these three stocks to short, Netflix stock may be your best option.

"Netflix, of that trio, is probably the worst." Gilani said. "I wouldn't want to own a stock with a 4.5% profit margin, and with a price-earnings multiple of 80. It makes no sense to me."

Likewise, Money Morning Technical Trading Strategist D.R. Barton said he wouldn't touch Netflix stock "with a 10-foot pole."

Since hitting its highs of $484.39 in September, Netflix stock has fallen more than 30%. Netflix should suffer a similar fate as Tesla and Amazon - if not a more pronounced triple-digit fall.

The Bottom Line: This bull market is getting old and is overdue for a major correction. That means now is a great time to look for short selling candidates. Tesla, Amazon, and Netflix are all overbought right now. Each is an excellent short selling candidate. "All three of these have been darling stocks, but they started rolling over in 2013," Gilani said.

 

More on Short Selling: The conventional approach to trading is to buy low and sell high, but what the conventional approach doesn't account for is that there are two sides to every trade. Wall Street has made quadruple-digit gains by taking the other side of the trade and Money Morning Members can learn how, too, with The Absolute Beginner's Guide to Short Selling...