I'm a long-term, buy-and-hold investor.

That doesn't preclude me, though, from having fun with some thought experiments, like what the perfect short would be.

My inspiration
Case in point: Last week, I was rereading one of Tom and David's very first books: The Motley Fool Investment Guide.

I noticed something I must have missed on my first read-though: a section on shorting stocks. Though the references in the book may be dated (they explain how to use ... the Internet), the guidance on shorting stocks hasn't changed.

Short candidate
After running through the numbers, I believe I've found a solid candidate for shorting: Morgans Hotel Group (Nasdaq: MHGC).

Operating in the posh, boutique hotel industry since 1984, Morgans now runs its business in "gateway" cities such as Boston, London, New York, Los Angeles, San Francisco, and South Beach, Fla.

Below, I'll run the stock through the four criteria the brothers lay out.

1. High ratio of debt to cash
Morgans currently has $6 million in cash, while sporting a debt load of more than $570 million. That's nearly 100 times more debt than cash!

To be fair, most of Morgans' value is tied up in its physical locations. But when compared to other hoteliers like Comfort Inn parent Choice Hotels (NYSE: CHH), Holiday Inn parent Intercontinental (NYSE: IHG), or Marriott (NYSE: MAR), it's clear that Morgans is swimming in debt.


Total Cash

Total Debt

Debt-Cash Ratio

Morgans $6.0 $572.8 95
Choice Hotels $76.4 $260.5 3
Marriott $144.0 $2,857.0 20
Intercontinental $59.0 $892.0 15

Cash and debt in millions, from Capital IQ, a division of Standard & Poor's.

2. Low levels of cash flow
This is a pretty open-and-shut case. Since 2005, the company has been cash-flow negative. Combining cash flow from operating activities and capital expenditures, the company has bled out roughly $137 million over the past five fiscal years.

3. A closed situation
When the Brothers Gardner wrote their book, they meant that it would be unwise to short a company that had an open-ended future. Think of Amazon (Nasdaq: AMZN), Apple (Nasdaq: AAPL) or Google (Nasdaq: GOOG); they don't fit nicely into any one industry or field. Whether moving into cloud computing (Amazon), all things movies and music (Apple), or even alternative energy investments (Google), all three of these companies could have their hands in a dozen different fields 10 years from now. It's not very Foolish (big F) to short a stock with such potential.

In Morgans, I highly doubt that we need to worry about this. They're having enough trouble turning a profit with their hotel business as it is now. This is probably a closed situation.

4. Low short interest
When a stock is heavily shorted, it poses a serious threat to those hoping to profit from its downfall. An earnings surprise -- or a herd mentality to cashing in profits -- can lead to a ballooning stock price. That's a shorter's worst nightmare. With only 8.9% of Morgans float being shorted, this isn't a concern.

Foolish takeaway
Like I said, I'm a buy-and-hold investor. I believe in owning companies, not just pieces of paper. For now, I'm happy to give the company a red thumb in CAPS and see how it plays out.

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