Traders Made Big Gains Short Selling These 5 Companies By Jim Bach

This bull market has been raging on for five years, but the most savvy short sellers have found incredible profits. You see, even when everything is going up in the market, there are still companies that are overvalued and have seen share-price losses this year. The post Traders Made Big Gains Short Selling These 5 Companies appeared first on Money Morning - Only the News You Can Profit From .

Short selling in a bull market isn't always easy, but the right level of skepticism can pay off in these overly exuberant times.

The herd continues to push the major indexes to new highs - the Standard & Poor's 500 Index hit another record high last Thursday at 1,987.94, and the Dow Jones Industrial Average topped out at 17,138.20 two weeks ago.

"It's hard to fight this bull market," said Money Morning's Capital Wave Strategist Shah Gilani.

Gilani is editor of the Short-Side Fortunesinvestment service, which seeks to make money off companies on their downside. These markets may make short selling difficult, but a skeptic can make a killing with precision timing.

"It's not about being right so much as it is about timing," Gilani said. "If you've got the guts, the capital to continue to add to losing positons, you can make a fortune."

So far this year short sellers have made the right moves on these five stocks...

Short Selling Success Stories of the Last Month

On the month, there are several examples of the short sellers getting it right. Below are five of the most heavily shorted, lowest-performing stocks in the S&P 1500 in the last month, according to BeSpoke Investment Group LLC.

GT Advanced Technologies Inc. (Nasdaq: GTAT) has a current short float of 36.2% and shares have been down 24.8% this past month. This diversified technology company put itself on the map last October on announcements that GTAT was going to enter into a $578 million deal to supply Apple Inc. (Nasdaq: AAPL) with sapphire material. AAPL uses sapphire as a protective cover for the cameras inside their smartphones, but some speculation has abounded since the GTAT-AAPL deal that the next generation iPhone 6 will employ a virtually unbreakable sapphire screen.

Then news reports came out earlier this month suggesting that the new iPhone would not have a sapphire display system... Analysts downgraded the stock and shares began to tumble as investors worried about future earnings potential should GTAT not be a marquee supplier for APPL's next smartphone display innovation. GTAT shares lost 15.6% on the day of the July 7 announcement, and shares have continued to drop to $14.30 as of Wednesday's close.
short sellingiRobot Corp. (Nasdaq: IRBT), with a current short float of 35.2%, has seen its shares dive 22% on the month. The pioneer of the Roomba, a vacuum-cleaning robot, faced heavy scrutiny in late May when the New York money manager Spruce Point Capital released a report that deemed IRBT shares overpriced and riding the hype of an imagined "robotics revolution." It reported that mounting competition in home vacuums was threatening to diminish its market share and dilute future growth potential.

The release of the report, however, didn't prompt a big sell-off and, in fact, did quite the opposite. Shares surged ahead 17.4% on the week. However, the short sellers were vindicated in this last week when the robotics company reported weak earnings and shares plummeted about 7.5% on the news.

Ebix Inc. (Nasdaq: EBIX) has its shares floated at a very high 47.1%, and they took a 14% hit this past month. EBIX supplies management software to the insurance industry. It has been in the crosshairs of the short sellers for more than a year now, since short selling firm Gotham Research LLC targeted what it called unreliable, inaccurate, and incomplete accounting in March 2013 and sustained that attack into September. It has since been the subject of SEC probes and civil litigation, and even took heat for alleged money laundering in its cross-border transactions. These lingering legal troubles ultimately derailed a merger agreement with Goldman Sachs & Co. (NYSE: GS) last summer, where GS had valued the company at $820 million.

Aeropostale Inc. (NYSE: ARO) has a short float of 34.2% and its stock has lost 8% within the last month. The mall-based teen clothing retailer is on the minds of short sellers because it has been slowly watching sales stagnate and its profits shrink. From 2010 to 2011, profits plunged 70% from $231.3 million to $69.5 million, before dropping another 50% in 2012, and eventually the retailer posted a $141.8 million loss in 2013. In April 2010, shares closed as high as $32.08, and have since plummeted 90%. ARO Chief Executive Officer Thomas Johnson has called the teen retail environment "challenging," and short sellers are looking to make a gain off of this slump for clothing retailers that has also brought down big names such as JCPenney Co. Inc. (NYSE: JCP).

3D Systems Corp. (NYSE: DDD) is shouldering a short float of 33.1%, and its stock has dropped 7.4% in the past month. DDD is considered the premier company for 3D printing solutions and additive manufacturing, but as in the case with IRBT, skeptics are wary that any hype in this new technology is only feeding a bubble. Activist short seller Andrew Left of Citron Research was one of the more vocal detractors of the 3D printing phenomenon, and released a report in February that accused DDD executives of exaggerating progress in the industry to artificially inflate shares, according to Reuters.

Even though the long-term outlook for DDD remains solid, our Chief Investment Strategist Keith Fitz-Gerald forecast this steep plunge at the start of the year.

In his 2014 Market Forecast released Jan. 6, Fitz-Gerald noted DDD's soaring share price of $94. He even pointed readers to a short-term profit opportunity:

"I love the products and love the potential, but 3D Systems has been bid up to amazingly high levels. It looks like a great short to me," Fitz-Gerald said. "Practically speaking, even though the company's products are at office supply stores and in catalogues, the average consumer hasn't gotten the bug yet so they aren't selling through. With a P/E of 200.89, I think it's ripe for a reversal just on a technical basis."

This short offered gains of as much as 30% as DDD stock plummeted as low as $55 in February.

The conventional approach to trading is to buy low and sell high, but what the conventional approach doesn't account for is that there are two sides to every trade. Wall Street has made quadruple digit gains taking the other side of the trade and Money Morning members can learn to too with The Absolute Beginner's Guide to Short Selling...

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The post Traders Made Big Gains Short Selling These 5 Companies appeared first on Money Morning - Only the News You Can Profit From.

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