My Best Investment Ideas for 2016
Long/short equity is an investment strategy generally associated with hedge funds, and more recently certain progressive traditional asset managers. It involves buying long equities that are expected to increase in value and selling short equities that are expected to decrease in value.
I believe investors should have roughly 40%-50% of their portfolios short with companies that could fail even in the most bullish markets.
In this article, I’ll be naming my best long idea and my best short idea for 2016. Investors can allocate 7%-10% of their portfolios to each of the two ideas.
Best Long Idea
My best long-idea for 2016 is Spirit Airlines (SAVE). Spirit Airlines has massively underperformed in 2016, and the stock’s decline in unwarranted. Unit revenue across the airline sector is falling rapidly, and investors worry that the competition on price will lead to bankruptcy of many companies like it did in the 1990s.
Amid the weak crude oil environment, air fares have reduced greatly, however investors’ concerns are unwarranted as airlines have clearly learned from their mistakes. The companies are cutting ticket prices at a very slow rate, and given the high demand, I expect ticket prices to stabilize very soon.
As a result, I think Spirit Airline stock has a lot of upside potential. The stock is trading at under 10x forward earnings and given the tailwinds, I think it can reverse its 2015 losses in 2016, thereby making it my best long idea for 2016. I believe Spirit Airlines has about 80% upside potential.
Best Short Idea
My best short idea for 2016 is Wayfair (W). The stock has doubled in 2015 and although it is still down from its 52-week high levels, I think it possesses great downside potential making it my best short candidate.
Wayfair’s business model is broken and the market hasn’t realized that because of the company’s stunning revenue growth. Although the company is growing revenue at a very fast rate, it is doing so because it is compromising profits and margins.
This strategy is only effective in the short-term. Over the long-term, investors will realize that the company doesn’t possess the ability to generate profits to justify its current valuation. Hence, I expect to see the stock trading around $10, down considerably from current market price of $48 in the coming months.
I recommend investors to have 50% of their portfolio short and the remaining half long. Also, I would suggest investors to allocate equal funds to both Wayfair and Spirit Airlines. I’ll be writing about my other best ideas in the upcoming articles.
Published on Dec 29, 2015By Ayush Singh