Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Short Selling

Short selling is the act of selling a stock first and then purchasing it at a later date. The mechanism actually involves borrowing the shares to sell and then purchasing the shares at a later point in time to give back and cover the borrowed shares. This happens automatically in the current electronic age, although there are some thinly traded stocks that are hard to borrow and therefore hard to short. You must be able to borrow shares to short them. The goal of short selling is for the price of the stock to go down. It’s the same concept as buying a stock, just in reverse. If you sold short shares at $20.00 and the price declined to $15.00, you made $5.00. Shorting technically can have unlimited losses, as the price can go up to infinity; while when buying stock, you can lose only 100% of your investment, no more, as the shares can only drop to $0.

How to Turn a Profit by Buying “Bad” Companies

By for Profit Confidential

Turn a Profit by Buying “Bad” CompaniesGroupon, Inc. (NASDAQ/GRPN) is up a sizzling 368% from its 52-week low of $2.60 on November 12, 2012. Many in the market thought Groupon was dead. I was not one of them; I actually saw a possible short-covering opportunity due to the massive short-selling position on the stock. All the company needed was some good news to drive the shorts to cover. Of course, this happened as Groupon reported positives in its business and strong results. The current short-selling position is 5.6% of the float as of August 30, versus 15.3% in February.

I usually view these intensive short-selling buying opportunities as a contrarian play in a company that the stock market may have judged wrong.

The key to short-selling buying success is to look for companies that have strong fundamentals but may be struggling with some poor results that can be dealt with. Of course, you won’t always be correct, but if you minimize the losses and ride the gains, then you’ll get good results.

Facebook, Inc. (NASDAQ/FB) was another case of a company with some difficulties following its initial public offering. (Read “Why Social Media Stocks Are Back on Top, Getting Stronger.”) The company had to convince investors that it could monetize its one billion users. Facebook focused on the mobile advertising market and was able to turn things around. The stock, under heavy short-selling pressure, quickly reversed course from its $18.80 low in October 2012, moving above $50.00 on Thursday.

Electric-car maker Tesla Motors, Inc. (NASDAQ/TSLA) was also seen as a fad by Wall Street and investors, as short-selling swarmed the stock. Yet the company was able … Read More

Why Tracking the Heavily Shorted Stocks Makes Sense

By for Profit Confidential

Tracking the Heavily Shorted Stocks Makes SenseWhen I look at potential trading opportunities, I like to scan for stocks that have high short selling positions in them. These are the traders betting against the stock.

Now, while there’s always some validity to why a stock becomes a short selling target, it’s not always the case; this is where I see contrarian trading opportunities.

Going against the grain does work, but there have been cases where a contrarian strategy has blown up in my face. The key here, like any other situation, is to make sure you have an exit strategy. So while some traders view heavy short selling positions as a negative, I view extreme short selling as a possible trade opportunity to make money by betting against the herd.

An excellent example of this is the case with Tesla Motors, Inc. (NASDAQ/TSLA), which saw 62.9% of its float shorted in mid-April, when the stock was trading at the $46.00 level. In my view, the amount of short selling was extreme and worthy of a look for the aggressive trader. The company subsequently reported some numbers and its outlook—all excellent.

The result was a significant pop in the share price of Tesla from investors buying and short-sellers covering. The stock surged 147% in about six weeks, with the shorts falling to 36.9% of the float as of May 15, according to data on Yahoo! Finance. A call option trade on Tesla would have yielded even greater returns due to the leverage used.

Take a look at the chart of Tesla below, and note the two major opening upside gaps as indicated by the purple circles, based … Read More

How You Can Play Google in Spite of High Price

By for Profit Confidential

How You Can Play GoogleIn my view, Google Inc. (NASDAQ/GOOG) is tops in the Internet space, and a better play than Facebook, Inc. (NASDAQ/FB) and Yahoo! Inc. (NASDAQ/YHOO), based on my stock analysis. (Read “Facebook’s Hot, But Valuation’s Questionable.”)

At just over $700.00 a share, you may think the stock is expensive. On an absolute basis, a $700.00-plus stock is not cheap, but on a valuation and comparative basis, Google is still tops, according to my stock analysis.

My stock analysis suggests that Google will continue to dominate and gain market share in the Internet space with its “Android”-powered “Nexus” smartphones and Wi-Fi Internet offering.

Wall Street is optimistic about the investment opportunity of Google. Let’s first take a look at what analysts are expecting. Of the 39 analysts polled by Thomson Financial, 11 rate Google a “Strong Buy,” while 20 analysts rate it a “Buy” and eight rate it a “Hold.”

The most bullish analyst among the group has a one-year price target of $900.00 on Google, versus the mean target of $799.32.

And in spite of its higher stock price, my stock analysis shows that Google continues to attract institutional buying, unlike many of the other major technology companies.

Institutional investors purchased 220,152 shares over the past quarter-to-quarter, which represents almost a 0.1% rise in institutional ownership, based on information from Thomson Financial. By comparison, institutional investors have sold 4.8 million shares of Apple over the same period.

Short selling is also relatively absent with a mere 17.9 million shares short, or about 1.9% of the float, as of December 31, 2012, according to Thomson Financial.

If you are eyeing Google, my … Read More

Stock Market Breakdown: How a Correction
Would Be a Buying Opportunity

By for Profit Confidential

earnings seasonI’d like to see a stock market correction so income investors could buy good dividend paying stocks at fair prices. I’m not rooting for disaster, of course, and I’m not fond of short selling. I just think that, if the stock market pulled back a normal three percent to five percent from its current level, it would make for a very good entry point for new positions.

Although the stock market has done very well since the beginning of the year, dividend yields have stayed about the same. This is due to dividends increases and, as expected, the news for income investors has been good and widespread among a number of industries. Corporations would still prefer to return excess cash in the form of dividends or share buybacks than invest in new plant, equipment and employees. It’s an easy strategy in an uncertain world and, at the end of the day, it keeps shareholders happy.

I expect more increased dividends announcements in the second quarter this year. I knew we were going to get lots of this in the first quarter (see Expect Big Increases to Dividends Over The Next Few Quarters), but when the second quarter ends, company managements have a good sense as to how the rest of the year is going to go. Increased dividends announcements during the first quarter resulted in solid institutional buying. Dividends news was actually an event-driven trade, which is quite remarkable. It would seem that, in the age of austerity, dividends paying blue-chips are once again all the rage. It’s pretty clear to me that, as a group, higher dividends paying … Read More

The Best Trade in the Current
Mini Bull Market: Short Selling

By for Profit Confidential

 institutional investorsThere’s been a lot of money made in the stock market lately and it isn’t from being long. The big story this year has no doubt been large-cap, dividend paying stocks, but I have to say that some of the best speculative bets have come from short selling. All the more impressive; the short selling money is being made during a stock market rally.

I’ll say straight up that I’m not a big fan of short selling in the stock market. Tons of institutional investors and individuals do it, but I don’t. I just don’t like betting on a company’s downfall and that’s what short selling is. Some would argue that a short selling trade was initiated because of a high stock market valuation, but I don’t care. Anyone short selling really hopes for a share price of zero. Myself, I’d rather invest in a business, not bet on its downfall on the stock market.

But, lots of people do engage in short selling and the profit from a declining share price (as well as institutional securities lending) can be substantial. As always, you need the right trade at the right time at the right price. Consider First Solar, Inc. (NASDAQ/FSLR), which is an enterprise I’m a fan of. It was only a short time ago that solar energy stocks were some of the best performing stocks in the marketplace. A lot of them were really hot when institutional investors embraced the alternative energy investment theme. Now, of course, the equity landscape is littered with solar energy casualties. The entire sector experienced a big boom, a major price correction during … Read More

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