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The Two Best Stocks to Short Right Now
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Stocks: amzn, ZM

The Two Best Stocks to Short Right Now

By Lyric Mott, Associate Editor, Money Morning • February 1, 2022

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Omicron has filled investors with hope that stocks like Peloton Inc. (NASDAQ: PTON) and Zoom Video Communications Inc. (NASDAQ: ZM) will skyrocket as they did at the pandemic's beginning.

Instead, these stocks have been on a distinct downtrend.

And while some analysts advised investors to "buy the dip," our experts said the opposite. And they were right.

One of Money Morning's top volatility experts, Garret Baldwin, called the Peloton dip back in December when the stock cost $38.50 per share. As a former Wall Street analyst, Garret regularly finds lucrative trading opportunities -- this one was no different.

While misled investors are running to buy "discounted" PTON stock, many of Garret's Money Morning LIVE viewers had already taken his advice to sell - and then short it - as it dropped.

It's been over 30 days since Garret made that call, and the PTON shares cost about 22% less than when he recommended the play, while the folks following his recommendation have pocketed at least that much in profit.

That's what shorting stocks can do for you. There's considerable risk, but considerable reward potential, too.

Let's go over everything you need to know about short selling, including how to make a killing.

For the Risk-Tolerant, Shorting Stocks Is a Winning Strategy

Short selling is a way to profit from a bearish stock. It involves borrowing shares of the stock, on margin, and selling them in the open market.

The hope is that the stock price will decline, allowing you, the trader, to repurchase the shares at a lower price. When you then return those shares to the owner - your brokerage - you keep the profits.

For example, you might open a short position while a company has a PR nightmare, or public financial struggles that could send their share prices down the drain.

Whatever your reason, you can make money when the stock goes down - just as you can also make money when the market goes down.

Shorting a stock is a quick trading strategy that lets you win big, as long as you're okay with some of these risks...

Here's What Could Move Against You

Short selling comes with a few risks, so doing the research beforehand is so important. When you short a stock, you should be aware of the market risk, dividend risk, and spin-off risk.

The market prices of securities you're betting on (or against) determine market risk.

With stock shorting, your market risk is the possibility that a stock price can jump instead of dropping.

Dividend risk is a bit more complex. When a company declares a dividend, it establishes a record date, and then an ex-dividend date (ex-date) is usually set for two business days prior.

You will owe the dividend if you haven't bought the stock back by market close on the day before the ex-date. It will be deducted from your trading account and paid to the owner of the shares. This may not seem worth mentioning when shorting 100 shares with a dividend of only a few cents per share. But if you short thousands of shares at the same price, it'll leave a noticeable sting.

Lastly, let's cover spin-off risk. When a company undergoes a spin-off, issuing warrants, or any other complex event, the potential losses can pile up. If you short one security because you think its price will fall, you could find yourself short two (or more) securities simultaneously. For instance, if you're short one company when it spins off a parent company, you would be short both, making your trade unexpectedly complex.

The good news is you can mitigate spin-off and dividend risk by setting specific exit dates and profit targets with your short.

Now that we've covered the basics, you can spring into action. Here's how you can turn a failing stock into hard cash.

How to Make Money with Short Selling

There are a few things to keep in mind when shorting a stock.

First, you have to find a reputable broker that has a large selection of stocks to choose from. You also want to make sure it has a good track record and allows short selling with your account type. You'll need to have margin - basically "credit" for your trading account - to sell stocks short, too.

Here is where the "research" comes in. As a trader, you want to know this information before opening an account. If you're in the market for a stockbroker that allows short-selling, TradeZero, Cobra Trading, and Interactive Brokers are a few out there.

Keep in mind that some brokerages charge a fee for each short sell order, while others have a minimum number of shares that you have to short. You inquire about these costs for your specific account and factor that into your final profit.

Second, you need to "open a position" by making an order to borrow shares from someone else. During this process, you never own the stock yourself. That said, you are responsible for paying the difference if that stock skyrockets while you're short.

Ultimately, the key to making money with this strategy is betting against stocks that you are confident will drop. Then, if everything goes as planned, you will have profited from the transaction!

Investors who want to profit from the potential decline in a security or index can either short the stock or use the alternative option: buying a put.

Shorting Stocks vs. Trading Puts

Shorting stocks and trading puts are popular bearish strategies that allow traders to hedge downside risk in a portfolio or specific stock.

We've gone over short selling, but what does it mean to "buy a put"?

Put options are contracts that give the buyer the right, but not the obligation, to sell a security at a specific price within a certain time period. The buyer of a put option pays a premium to the seller for this right.

The goal of buying a put option is to profit from a price decline in the underlying security.

This differs from shorting the stock, where you are required to buy back the shares you sold whether or not prices dropped as you expected. The risk of losing money is high, but winning means you keep all the profits for yourself.

For a deeper breakdown of borrowing stocks vs. trading puts, click here and check out the free Money Morning LIVE "Toolkit" video on the subject.

Choosing between the two strategies is a matter of risk over reward. Buying a put is less risky but slightly less rewarding. Shorting is much riskier, but a successful play means more overall profit.

Now, let's put everything you've learned into action. Here are two stocks for a super lucrative short play.

The Two Best Stocks to Short Right Now

Now that you know how and why to short-sell stocks, Garret Baldwin recommends two really terrible stocks to target.

Zscaler Inc. (NASDAQ: ZS) is a cybersecurity company that provides a Cloud-based platform for customers to secure their networks. The company has enjoyed strong growth over the past few years, and its stock price has followed suit. However, we consider the stock overvalued and feel that investors would better sell it short.

The company's valuation is simply too high, given its growth prospects. Its current price-to-sales (P/S) ratio of 11.5 is much higher than the industry average of 3.2.

And though Zscaler's growth rate is impressive, it is likely to slow down in the future as the market becomes more saturated with other cybersecurity stocks.

There are also several potential threats to the company's business model. For example, Amazon.com Inc. (NASDAQ: AMZN) could easily decide to enter the cybersecurity market and steal or take over Zscaler's target market.

Based on its recent performance and analysts' expectations, Zscaler Inc. could drop in the next month by 10%.

Blink Charging Co. (NASDAQ: BLNK) is a technology and services company that provides electric vehicle (EV) charging solutions.

Unfortunately, it's been bleeding cash for years, and it doesn't look like it's going to turn around anytime soon. Case in point, its 2021 Q3 earnings per share (EPS) came in at -$0.83. As a result, investors are losing money on this stock, and we don't see that changing soon.

There's also a good chance that BLNK will get delisted from the NASDAQ. The company has failed to meet listing requirements in the past, and it's not clear that it will be able to do so in the future.

All of this makes BLNK a great short candidate; there's an excellent chance the stock will fall, which makes Blink a great short target. However, if the stock falls, there's a lot of upside potential, and there's a good chance it will. Garret predicts a 29.54% drop in the coming months.

The Best Trading Strategies To 3x Your Win Rates

The investing and trading experts at Money Morning LIVE deliver real-time investing ideas, market analysis, and lucrative picks.

Get daily investing ideas and stock picks every day from proven trading experts like Garret Baldwin. Just this month, he called a major play that's earned traders a shot at thousands in profits. Join us at Money Morning LIVE today to catch Garret's daily hot stock watch list and more.

Join over 500,000 readers and get free daily updates on the best ways to make money. Subscribe to Money Morning.

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