It would be very risky shorting AOL at this particular moment, even though the fundamentals may seem poor at this point. The stock is enjoying a great deal of support from institutional buyers, who tend to move in a great pack following analyst expectations. There has been a lot of money flowing into mutual funds over the past couple months, and much of this money is getting placed into the large-cap, highly liquid stocks that have the OK from the analysts at the big houses; stocks like AOL. The institutional investors are very easy to observe, and they take time to move stocks up and to move them down. It is just plain nuts to start shorting AOL before the institutions start leaving it, which will probably take several months, at least.
Everyone knows that AOL will announce losses at the end of this quarter. These losses are anticipated and have already been disregarded by the street. AOL will have a lot of leeway with its accounting procedure this quarter, since it will be getting a big one-time cash infusion from the users that will sign on for the prepaid 1 and 2-year plans. So it would not be surprising if AOL beats consensus estimates by a few pennies, and loses less than anticipated. That will support the stock for another few weeks, at least.
The institutional support for this security will only fade away when sequential operating results prove disappointing. If the earnings announcement in April after Q1 comes in below expectation, a lot of analysts and institutions will start to label the "new media company" idea a failure, and you can be assured that the stock will begin a strong decline.
But right now, it is just plain idiotic for the small investor to mess around with the analyst/institution complex. Individuals make their money anticipating the herd, not by standing in the middle of a stampede. Wait until the herd has calmed down at a higher price equilibrium. When you observe that point, start placing puts for a few months ahead. That's the best way for you to cap your risk on this play.
Personally, I shorted the stock a few weeks ago at 29 1/2, believing that the company's business plan was fundamentally unsound. But after the pricing plan announcement, and after three analysts upped their ratings on the stock, I knew it was time to get out, which I did at about 35. I still think that my view is correct, and that this company is headed for disaster. But I feel it just makes sense to let the institutions play out their game before I reestablish a short position.
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