Trader's Edge: Long Has Been Wrong
05-Apr-01 08:15 ET
Where have the momentum players gone? Having grown weary of being the dumping ground for VC and insider shares, and no longer afraid of being trampled in a scramble to cover, the fast money has moved to the short side of the market. The shorts are thriving in the current environment of overwhelming fear, no longer worrying about being victims of shenanigans such as stock split announcement doubles or analyst price target pump jobs.
It Only Makes Sense
After several years of taking it on the chin, short sellers are looking extremely smart these days. Their return to the market coincides with the reemergence of the common sense style of investing that we have often referred to. In a rationale market, cheap stocks should be accumulated and disconnected valuations should be shorted. It has been almost three years since these rules have applied; taking the pricking of the equity market bubble to bring them back.
Looking for Opportunities
Only recently has the media begun to highlight the high level of shorting taking place in the market. This is a subject that Briefing.com has made an effort to discuss during relevant periods. Admittedly, we have not spent enough time on the topic. Our main reason for being less active in highlighting opportunities on the short side of the market was a fear of less experienced traders failing to appreciate the risks associated with selling short. Following a number of subscriber requests and after having to move into NYSE stocks for hopes of meager short term returns (usually looking for at least 15% from a Trader's Edge stock), this analyst recently decided to present some opportunities on the short side. Given the environment, it seemed a much safer proposition that anything we could think of to go long.
ONI Corp (ONIS) and Tellabs (TLAB) were recently highlighted as overvalued stocks with considerable downside risk over the short term. Since our February 28 report on the company, shares of ONI Systems (ONIS) have fallen more than 50%... Shares of telecom equipment maker, Tellabs (TLAB), have eased as much as 21% (yesterday's low; down 17% based on yesterday's close).
Bringing Them In
With earnings season finally upon us, we think that shorts will finally begin to reel in positions, driven, at the very least, by a desire to reset positions at higher prices. The advance in equities will be a function of the sharp reductions in earnings estimates that have occurred in the large-cap technology leaders over recent weeks, and the subsequent price implosions in the stocks. It finally feels as if most of the near term earnings risk has been priced into the market. This could create a scenario where stocks begin to experience positive reactions to earnings warnings.
We believe that this is an angle traders should focus on this earnings season. A bevy of technology sector names have experienced share price gains that more than adequately reflect the near term earnings risk. While this does not necessarily mean that they have established lows for the downturn, we think the combination of high short-interest and oversold technicals will set many of these names up for a run in price.
Attached is a list of stocks that we feel have the potential to build value this earnings season. Some of these names will work out, while others continue descent in response to warnings that are even more severe than had been factored into the stock price. We present this list simply as a starting point. It is difficult to figure out which companies will issue earnings preannouncements, and almost impossible to determine when exactly the warnings will be issued... Each morning will present new trading opportunities. Our focus would be on companies that manage to stay within 30%-35% of analysts' earnings expectations.
Company % Decline Since Last Report Estimate Trend (8 wks/13 wks) Tentative Forward P/E Short-Interest Float
Emulex (EMLX) 87% -10%/-18% 13.2 3.45 mln 72 mln
Openwave (OPWV) 72% 0%/+800% 22.5 4.1 mln 142 mln
McData Corp (MCDT) 69% -10%/-18% 23.3 6.3 mln 18.3 mln
Cisco (CSCO) 62% -44%/-50% 21.1 64.2 mln 7.153 bln
*Earnings trend refers to the change in consensus estimates over the stated period. For example, Emulex data of -10%/-18% refers to a 10% decline in the mean estimate over the past 8 wks, and an 18% decline over the past 13 wks. |
