Looking forstocks poised to make a major move? Then find the
companies that are loved and hated by investors. These three
hotly-debated stocks have been in the headlines recently as bulls
and bears duke it out. And depending on which camp holds the
stronger argument, big profits (or losses) are likely to be bagged
in the trading sessions ahead.
A crowded and dangerous short Much has been written
abouthedge fund manager Bill Ackman's high-profile battle
against this seller of nutritional supplements. As a quick
recap, Ackman thinks Herbalife is a glorified pyramid
scheme, with a multi-level sales force that only prospers
by signing up yet more sales people further down the rung.
Indeed, these types of businesses often implode once a
freshwave of re-sellers can't be convinced to sign on. In
effect, the music finally stops, as was the case in the
past decade with a number of fruit-based drink businesses
that promised stunning health benefits -- and big profits
for its sales force -- but ended up washing out.
Is Ackman right? He's likely correct when he says that
many Herbalife sellers lostmoney as they failed to sell
enough products to recoup their upfront sign-up costs. Yet
he's also ignoring the fact that many Herbalife sellers
have made money on product sales. To suggest that this
company has never actually sold products seems to greatly
Regardless, this is precisely the kind ofstock you
should never short for some obvious reasons. First, it's
what's known as a "crowded short," which means that it's
already so heavily-shorted that ashort squeeze is often the
Also, Herbalife appears driven to derail shorts by
buying backlots of stock (the company claims to have a $1
billion buyback in plan, but withnet debt of $180 million,
that figure is likely quite over-stated). Still, share
buybacks of any size force short sellers to return
borrowedshares , which has the same effect as a short
squeeze. Indeed, shorts have recently been burned on this
There is an ideal strategy for those who still want to
short Herbalife: Wait for the short squeeze to play out,
which is likely to continue as long as themarket is in its
current rally mode. When tradingvolume drops, and shares
start to drift lower, then it's likely safer toput on a
short position. By then, this short may not be as
Netflix (Nasdaq: NFLX)
Carl Icahn's folly? Mimicking the moves of hedge fund
manager Carl Icahn is often a losing game, at least
according to myCEO has repeatedly stated, there is no
interest in selling the company. For that matter, it's
unclear if there are any potential buyers either.
"Although Icahn's entrance brought freshacquisition
speculation , we believe potential acquires would rather
wait than acquire Netflix at current levels given
deteriorating fundamentals,"note analysts at Merrill
Yet hopeful investors have bid this stock up anyway,
from under $60 at the start of the third quarter to a
recent $90. That 50% gain has pushed Netflix'smarket value
above $5 billion, which is hard for any potentialacquirer
to justify, considering Netflix has yet to reach $200
million in annualfree cash flow . And that $5 billion
market value figure understates matters. "The real cost to
acquire NFLX is closer to $10 billion in our view.
Management'sinvestment expense guidance and a large $5
billion contentliability could quickly turn a light meal
into a strategic corporate ulcer, in our view," suggest
analysts at Albert Fried & Co.
At this point, this stock's heady run seems to have
locked in all of the potential reward, and the downside
looks much more apparent. Merrill Lynch analysts think that
even if Netflix were acquired, the purchase price would be
around $73 a share.
Sirius XM Radio (Nasdaq: SIRI)
The shorts smell trouble. Shares of this satellite radio
provider posted one of the strongest gains in the market
over the past six months, rising roughly 50%. Rising auto
sales have been a clear boost (as the service comes
pre-installed on many new cars), and the company's debt
woes vanish. Indeed, a number of sell-side analysts have
$3.50 or $4 price targets, implying another 15% to
30%upside from current levels.
Yet short sellers are unconvinced: They now hold 370
million shares in short accounts, which is a 9% rise in
just the two weeks ended mid-December. That's the largest
position on either the Nasdaq or the NYSE.
Short sellers appear to be focusing on the fact that
Sirius XM is spending nearly $300 million a year on
customer service. This is a high churn business, as the
free service that comes with new cars eventually expires,
so the company must spend heavily to retain its customer
base. Shorts may also be focused on the fact that shares
trade for around 30 times projected 2013 profits, and this
is for a business that is seeing growth slow to around
10-12% a year.
Still, this is a very profitable business (free cash
flow was $400 million in 2011 and likely higher in 2012),
and Sirius is in the midst of a $2 billion share buyback --
which can always cause pain for short sellers. Betting
against Sirius may prove foolish.
Risks to Consider:
Highly controversial stocks like these can post swift gains in
either direction, so you need to stay abreast of changing events
while you own them.
Action to Take -->
The "Fiscal Cliff" resolution has kicked the markets higher in
early 2013, which can cause extreme pain for short sellers. It's
often wise to avoid shorts in such times, though when the rally
(eventually) peters out, these heavily-shorted stocks can often
face fresh selling pressure, making them good bets at that
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.