Many investors focus primarily on buying the best stocks. While this is a good investing strategy, it ignores other ways to capture profit from the markets.
For example, quick double-digit profits could be on the table with these three stocks to short now, as identified by Money Morning Chief Investment Strategist Keith Fitz-Gerald.
Fitz-Gerald has more than 30 years of experience as a market analyst and professional trader. And he's known for making money from stocks whether they're going up or down. That's why he's able to turn three of the "worst" stocks on the market into great profit opportunities for readers.
Before we look at Fitz-Gerald's three favorite stocks to short now, here's a quick primer on shorting stocks...
How to Short Stocks
When shorting, you're betting on a stock going down. The process involves "borrowing shares" of a stock from your broker and selling them. You then use the proceeds you made from selling your borrowed shares to repurchase shares of the stock at a lower price (if it goes down in price). This is called a cover. Your profit potential is based on the difference between the price you originally borrowed and sold the shares at and the price you rebought the same amount of shares at.
Here's an example: If Tom thinks stock X is going to plummet, he would check to see if shares of stock X are available for shorting. The broker would then check his inventory to process Tom's request.
If the broker gives Tom the green light, Tom would sell, say, 100 shares of Stock X at $100. He now has $10,000 in proceeds. That money is deposited straight into his account.
Let's say that two months later, the price of stock X has fallen by 30%. Tom decides to buy shares back to "cover" the trade. He takes some of his initial $10,000 and buys 100 shares of stock X at $70 per share. The difference between what he paid initially ($10,000) and the cost of his cover ($7,000) yields his profit. Tom just made $3,000 that's his to keep, while his broker gets back 100 shares of stock X for his inventory. Everyone's happy.
As a reminder, before you short anything, you'll need approval from your broker. That's because shorting entails a substantial amount of risk for both you and your broker.
For instance, if stock X had risen in price from its initial $100 per share and you were betting on it going down, you'd have to make up the losses from your short by paying your broker.
You can short a stock for as long as you want, but interest will be charged to you. So keeping a short sale open for an extended period of time will cost more to you.
"Obviously, going against the grain isn't for everybody - it takes a lot of guts and more than a little conviction to do it profitably," Fitz-Gerald said. "Not to mention a healthy dose of discipline."
But when it's done right, shorting stocks can add a sizeable boost to your portfolio returns.
"Best of all," Fitz-Gerald said, "you'll never have to fear a market correction ever again!"
As we mentioned earlier, Fitz-Gerald has three stocks that he sees as major short prospects.
Let's take a look at them now...
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Stocks to Short No. 1: Twitter Inc. (NYSE: TWTR)
Twitter has yet to create any redeeming value for its shareholders. And even rumored buyers, like Walt Disney Co. (NYSE: DIS) and Salesforce.com Inc. (NYSE: CRM), now seem to be avoiding the embattled company...
"Suitors aren't just walking away," Fitz-Gerald said, "they're running in the other direction judging from a blizzard of interviews telling the investing public why 'they're not interested,' which is highly unusual given how confidential these things usually are."
Recently, the microblogging company announced it is culling nearly 8% of its workforce to control costs. But that's unlikely to help...
Related: How to Profit from a Stock Market Drop
Twitter is simply refusing to try anything new or shake up its ailing business model.
In a recent interview with CNBC on Oct. 27, CEO Jack Dorsey was asked whether there were any "revolutionary products" in the pipeline. Dorsey replied by saying that Twitter's product is "already revolutionary." He also added that Twitter is focused on improving its core product every day.
This sounds like a company refusing to adapt, despite its bleeding revenue. But that's your short opportunity. Last fiscal year, Twitter reported a net-income deficit of $521 million, up $441 million from 2012.
And at $17.54 per share Tuesday intraday, TWTR is trading roughly 48% lower than its IPO and down 38% year over year. Expect TWTR to keep falling over time, even though it got a small price bump from beating its recent Q3 expectations. That simply won't last. In fact, Fitz-Gerald thinks that Twitter is currently worth $1 per share.
Stocks to Short No. 2: JCPenney Co. Inc. (NYSE: JCP)
Once a proud brand, JCPenney is now struggling in a "retail ghost town," according to Fitz-Gerald. Same-store, brick-and-mortar retailer sales are unlikely to rise anytime soon, especially with online retail behemoths like Amazon.com Inc. (Nasdaq: AMZN) stomping about.
JCPenney's problem is a combination of dwindling sales and an inability to lower its expenses quickly enough. The company has been running on a net-income deficit for five straight fiscal years, according to FactSet. During the same time, its long-term debt has increased from $3 billion to over $4.6 billion as of January 2016, with total liabilities exceeding $8 billion. Its assets are almost half that. That means even if the retailer were to start selling off its properties, it couldn't cover its ballooning liabilities. And its $416 million in net operating cash flow can't do the job, either.
JCPenney shows all the signs of a failing retailer. It's only a matter of time before it starts closing stores nationwide and cutting back its workforce to stem costs.
JCP is currently trading at $8.46 per share Tuesday intraday, down 7.7% YOY.
Stocks to Short No. 3: Sears Holdings Corp. (Nasdaq: SHLD)
Sears is an iconic brand that many of us grew up around. That sometimes gives us a notion that this network of retailers is a mainstay. But Fitz-Gerald has good reason to believe Sears won't be around in five years. In fact, Sears' tragedy is quite similar to JCPenney's. But Sears has progressed even further into its coming collapse...
"...the company is scrounging up billions in cash by selling its most valuable assets including - potentially - Kenmore, Craftsman, and even DieHard," Fitz-Gerald said. "I think bankruptcy and liquidation are all but inevitable."
Already, the company has reduced its assets by almost 50% over the past five fiscal years, from $11.5 billion in January 2011 to $6 billion in January 2016. And like JCPenney, Sears has far too much in liabilities - $13.5 billion as of January 2016 - that its assets or free cash flow can't hope to cover.
SHLD is currently trading at $11.01 per share Tuesday intraday, down a staggering 52% YOY.