3 Stocks Short-Sellers Should Love to Hate

Short-selling often gets a bad rap, but it's an important component in a healthy stock market, and we have three great short picks for you today.

Feb 10, 2014 at 10:53PM

Shorting stocks often gets a bad rap in the media, but for investors, it's one of the few ways to make money off a declining market. It also plays an important role in keeping stock values in check.

There are a number of things to look for when looking for a short sale opportunity, like quality of the business, industry trends, and valuation. I've highlighted three of my top short candidates and why I think they're worth betting against right now.

The history of retailers going from the top of the industry to the bottom is long and distinguished. Not long ago, Sears, Kmart, and J.C. Penney were big names in retail, and now they're struggling just to survive. Wal-Mart (NYSE:WMT) is far from that kind of disaster, but it's definitely losing the cachet it once had, and as a result, same-store sales are down in the past year, which is the first sign of trouble for any retailer.

Wmt Image

Wal-Mart has seen fewer items go through checkout lanes like this one in the U.S.

The reason this is a good short sale is that Wal-Mart is still valued as if nothing is wrong. The stock trades at 14 times trailing earnings, and with same-store sales falling in the U.S. and 50 stores being closed in Brazil and China, Wal-Mart will probably see profits fall in 2014. When a company cites food stamp cuts as one of the reasons it won't hit expectations, you know it's not the kind of stock you want to own as the economy improves.  

Shorting on valuation alone is tough, and that's what makes Tesla Motors (NASDAQ:TSLA) my highest-risk short pick. But I think the market has given way too much credit to a company that still makes a single model.

Consider that 22,450 Model S vehicles were delivered in 2013 and Tesla has a $22.9 billion market cap. That means Tesla is worth $1 million for every car it delivered during the year. Meanwhile, Ford is worth $23,678 per vehicle sold last year and General Motors is worth $18,003 per vehicle sold.  

Competition has also just barely started to pay attention to the electric-vehicle space Tesla dominates. BMW is introducing its i-series to compete directly with the Model S, and Ford, Nissan, GM, and others are increasing EV development.

The EV space is something Tesla owns right now, but that's only because it's not a big enough market for the big automakers to put the attention necessary into competing in. Once they do, Tesla's margins and sales will come under pressure, and it will be very difficult to justify its $23 billion valuation. Remember that Ford and GM are worth just over twice that, and they made 2.5 million and 2.8 million vehicles, respectively, last year. That's over 100 times more than Tesla, a huge disadvantage in a business where scale matters.

Fb Hq Image

Facebook is getting the thumbs down from teens lately, which challenges its long-term growth prospects.

The market is in love with Facebook (NASDAQ:FB) once again, pushing its stock to an all-time high on Friday and giving it a market cap of $164 billion. Investors were excited that Facebook is learning now to send ads to mobile devices. But the problem I have with Facebook today is the "cool" factor, or, more specifically, how "un-cool" it is with teens today.

iStrategyLabs recently published a report that suggested a 25.3% decline in the 13- to 17-year-old age range and a 7.5% decline in those 18-24 between January 2011 and January 2014. Meanwhile, users 35-54 grew 41.4% and those 55 and over grew 80.4% over the same timeframe. Facebook is less cool with the kids, and as Grandma and Grandpa sign up, the younger generation will lose even more interest, moving on to the next social-media fad.

The numbers iStrategyLabs used aren't as exact as what Facebook has available and studied only the U.S., but it shows general trends Facebook itself has acknowledged. Since Facebook started in a Harvard dorm room a decade ago, it was teens and young adults who drove its growth, but now they're leaving in droves, and that's a troublesome sign.

At the very least, the downside risk is much higher than the upside potential. We saw how fast a social-media network can go bust when MySpace lost its crown to Facebook and new networks such as Twitter are already stealing users.

Investors can fall out of love with Facebook as fast as they "liked" its earnings in the fourth quarter, and at 57 times forward earnings estimates, investors who short the stock are getting a head start with such a high valuation.

Shorting stocks can diversify your portfolio
These are three great short opportunities for investors with a long timeframe to ride out the day-to-day waves of the market. A few short positions can also add diversity to your portfolio and give you a way to make money if the market goes down.

Tell us what your favorite short picks are in the comments section below.

A stock you shouldn't be betting against
Those are a few short picks but if you aren't ready to sell the sell button, The Motley Fool's chief investment officer has selected his No. 1 stock to buy in 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Travis Hoium manages an account that owns shares of Ford. The Motley Fool recommends BMW, Facebook, Ford, General Motors, Tesla Motors, and Twitter and owns shares of Facebook, Ford, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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