The reason for shorting SUNW, which is overvalued, is as a hedge against long positions in other stocks that are not as overvalued. SUNW has resistance just above its current price and no immediate news, that I know of, to force the price through its all time high.
The major long position that I will be increasing tomorrow, according to current plan, is in INTC. INTC is making new highs and has no such resistance. It is also proudly displaying its technology at the the ISSSC this week, and IDF next week. Thus it is likely, in my opinion, that INTC is more susceptible to rise in the short term than SUNW is.
Should the market drop as a whole, the overvalued stocks historically drop the most. Historically, INTC has proven relatively insensitive to marketwide drops.
When making a judgement as to whether a stock is overvalued, I look at PE and growth rates.
SUNW has an earnings growth of something like 23% whilst its PE is 4 or 5 times higher than that.
If I do short SUNW, and it subsequently breaks through its resistance, it is likely that I will cover. As there is not much difference between current price and the price it would be at after breaking out, the loss would be small.
There is of course a risk of a large gap up, but I do not see that as particularly likely and am happy with the level of risk. |
