Five Great Shorting Opportunities for Investors

Since my recent short calls have yielded great profits, I have decided to make a list of my best short ideas. In this article, I’ll be penning down the companies that I think represent the best shorting opportunities in the market.

Wayfair (W)

I’ll start the list off with my best short idea. Wayfair engages in the e-commerce business in the United States. It offers approximately seven million home products under various brands. The company’s stock has doubled in the last few months, and in my opinion, now is the perfect time to short the stock.

The company has witnessed double-digit revenue growth over the last few quarters.
However, it is still struggling to report profits. I have never been a fan of the companies that ignore profits to grow revenue. But in Wayfair’s case, the lack of profitability is an even bigger concern.

Although the company is witnessing double-digit revenue growth—primarily due to high marketing expenses—it is operating in an extremely competitive market. Wayfair competes against the likes of Amazon, Target, Wal-Mart etc., which is why I think the company’s chances of turning a profit a next to zero. Hence, I would recommend investors to short Wayfair as it possesses roughly 80% downside potential.

Price Target: $8

Shake Shack (SHAK)

Despite reporting a good quarter, Shake Shack’s shares are struggling. Shares have dropped considerably in the last few months, however I still think there’s more downside potential. Following the rise of Chipotle Mexican Grill, many investors are desperate for a similar growth story. This explains the hype surrounding Shake Shack.

However, since the stock is overpriced, investors can expect another secondary offering in the near future as the company doesn’t have enough funds to expand. The company has over $69 million in cash versus total debt of under $313,000. However, the company will need to open hundreds of more outlets in order to grow into its present valuation, and it will definitely need a lot of cash to do that.

In addition, pre-IPO holders of Shake Shack recently dumped over 26 million shares. This shows that the insiders don’t believe in the company’s rich valuation and expect it to move down in the near future. Hence, I think Shake Shack is a short with about 30% downside potential.

Price Target: $30

GoPro (GPRO) and Ambarella (AMBA)

I have been bearish on GoPro and Ambarella for quite some time now. I believe GoPro’s business is a fad and the stock, despite its massive plunge, is still overvalued. The same can be said for GoPro supplier Ambarella. Both the stocks witnessed meteoric rise last year due to the hype surrounding GoPro’s one-hit-wonder cameras. However, with GoPro’s fad slowly dying, bulls are starting to realize the truth about the company’s business.

GoPro recently shared terrible earnings report and slashed its guidance. This affirms the fact that the company’s growth is slowing down. Apart from slashing its guidance, GoPro’s management also sanctioned a $300 million buyback. While longs may consider this as a vote of confidence, I think it signifies that GoPro’s fad is dying faster than the company was expecting.  A company in a high-growth phase never spends hundreds of millions of dollar on buybacks and dividends.

Clearly, the management is out of ideas, which is why these two stocks make my list of the best short candidates.

GoPro Price Target: $15

Ambarella Price Target: $40

Mobileye (MBLY)

Mobileye, together with its subsidiaries, designs and develops software and related technologies for camera-based advanced driver assistance systems (ADAS) primarily in Israel. Mobileye has risen to fame thanks to excessive bullish coverage from Morgan Stanley and as a result, the company has a market cap of over $10 billion.

While Mobileye did make a breakthrough in the ADAS industry, the company’s overvalued. The company does supply to Tesla, but that has further added to the hype. Given that Tesla only sells a few thousand cars annually, having Tesla as a customer won’t help Mobileye justify its stretched valuation.

In addition, the company has no early movers advantage as it doesn’t have any registered patents. The insiders have confirmed the overvaluation of the stock as they have sold over $1.6 billion in company stock since IPO at an average selling price of $33.14, which is about 40% lower than Mobileye’s current share price. Thus, I think the stock is a great short.

Price Target: $15

Conclusion

I think these five stocks present the best shorting opportunities in the present market. With all these stocks way overvalued, I think investors should consider initiating a short position to benefit from the overvaluation.
Published on Nov 17, 2015
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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