Being short stocks may, at first, seem complicated to the novel investor. Yet, the basic principle is this: short-sellers make money by betting against individual stocks. In order to short a stock you simply borrow shares from a broker and sell them to another buyer, only to buy those shares back later -- ideally at a lower price.
If the stock price drops, the shorts profit the difference. However, short-sellers can quickly lose money if said stock rises on upbeat news or a positive quarterly report. Here's a useful and straightforward fact sheet for more in depth information on shorting stocks. In the meantime, three Motley Fool contributors explain below why GoPro (NASDAQ:GPRO), Weight Watchers (NYSE:WTW), and Microsoft (NASDAQ:MSFT) are three stocks investors shouldn't short today.
Brian Stoffel (GoPro): One of the most dangerous things an individual investor can do is short an already-heavily shorted stock. That's because if the company you are shorting comes out with surprising and positive news, you'll get caught in a short-squeeze.
The way things are going today, I'd avoid shorting GoPro (NASDAQ:GPRO). In full disclosure, I already own the stock, but I've prepared myself for a rough couple of months: the company doesn't have a new iteration coming out for the holiday quarter, and it just had to lower the price of its Session camera.
Currently, 32 million shares of GoPro are being sold short, according to Nasdaq. Because insiders own so much of the company, that means that over half of all available shares for trading -- "the float" -- are being sold short, an extremely high percentage.
Since going public in 2014, GoPro hasn't had a single quarter where it didn't exceed analyst expectations for earnings. With many already factoring in a slow quarter for GoPro, it wouldn't be a huge stretch to believe that the trend will continue. If it does, and if management signals an upbeat outlook for the holiday quarter, it could create a lot of pain for short-sellers.
Tamara Walsh (Weight Watchers): The weight management company has been a favorite among short-sellers for years. Those betting against the stock are quick to note increased competition from fitness devices and health oriented smartphone apps and a subsequent shift away from traditional weight management services such as those offered by Weight Watchers.
However, Weight Watchers received a major celebrity endorsement earlier this month when Oprah announced a 10% stake in the company. This sent the stock soaring. Shares of Weight Watchers increased a whopping 150% in just five days on the news. This no doubt forced many short sellers to cover their positions, likely at a significant loss. Although, with Weight Watchers' stock now trading at more than 32 times next year's earnings, many of the shorts have gotten back into the name. "Borrowing in Weight Watchers shares jumped 25%" following Oprah's investment, according to Reuters.
More than 27% of Weight Watchers outstanding shares are now sold short. While this means a lot of investors are currently betting against the stock, it also means that any upbeat news could trigger a short-squeeze thereby forcing short-sellers to cover their positions and thus pushing the stock higher.
It is a bad idea to bet against media mogul Oprah. After all, Oprah isn't just buying a large stake in the company. She's also a brand ambassador for the weight loss program, and one with a massive consumer following. The talk show star also snagged a board seat, which will give her more influence over the company going forward. Ultimately, Oprah's involvement could help Weight Watchers attract new customers. And with New Year's around the corner millions of people will likely be setting weight loss goals -- two catalysts the could burn the shorts in the months ahead.
Tim Brugger (Microsoft): Taking a short position is often done with the near-term in mind, which is why stocks like Microsoft that have risen fairly dramatically, and quickly, are often targeted. Microsoft's share price climbed nearly 14% in the days following its fiscal 2016 Q1 earnings announced on Oct. 22. A prime target for shorting? No, because the run-up is not only warranted, it's overdue.
As Microsoft demonstrated again this past quarter, it's delivering on CEO Satya Nadella's mobile-first, cloud-first initiatives. As importantly, it appears investors have finally realized that Microsoft's fortunes are no longer reliant on the PC market. Despite revenue declining by 7% on a non-GAAP basis (excluding one-time items) last quarter – which would have been disastrous even a few quarters ago – the Street focused on the results that matter.
Its flagship product Office365 continues to impress, climbing nearly 70% in commercial revenue in Q1, and growing its consumer subscription base by about 20%. The recently unveiled Windows 10 already boasts more than 110 million unique device downloads, and its rapid adoption helped drive Bing's 29% increase in revenue last quarter, after factoring in currency headwinds.
But it was Microsoft's cloud efforts that stole the show, and the primary reason its current valuation -- and more -- are sustainable. At an annual run-rate of $8.2 billion, and growing, Microsoft's cloud sales are paying huge dividends. Yes, it took a while for investors to appreciate the results of the new Microsoft, but now that they have its stock doesn't belong on a list of shorts.
Brian Stoffel owns shares of GoPro. Tamara Rutter owns shares of Microsoft. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends GoPro. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.