Thanh, to add some points about shorting high fliers:
Some or them are talked elsewhere, others are JMO but after the frenzy (1998) it should fit together.
What are the facts for the run-up till now.
-Average S&P P/E ras risen to 30, which is considered a "peak valuation" for the part of analysts who think of "value" in terms of earnings. But the new peak may read: 40 times as the interest rates are that low now and money had to flow into equity.
Personally I'm not that interested in median valuation but the unhealthy distribution of valuation over different industries. It was enough to signal "Yes, I'm internuts, too" to have gained by multiples.
On the other hand, cyclical industry, carmakers and steel factories are traded on low 10-ish forward P/E for simply they are not in "fashion". Note that 2 months ago (!) internuts weren't in fashion as stocks generally have not been touted.
-The flying internet sector is only compared amongst each other by "analysts", ie what counts is relative value. Look the online shopping sector, a model which has to proove its sucess yet, in terms of getting big.
Relative valuation meant now: if EBAY is up that far, others MUST follow suit, ie MALL. If MALL get the new price within days, the competitors must be priced same way. Note that uBid didn't hit the market yet. So, ONSL, COOL, EGGS, CYSP, were taken up in the bidding. Even BFLY was carried on the day.
From the books/Cd/video tier, after AMZN soared, stocks like (KTEL), CDNW/NTKI, BAMM, KLB were discovered and priced.
And another frenzy is to note: The pre-IPO and parent buying. Not only MALL,DBCC or WCAP or now, I used it, SDTI (owns parts of VeriSign), TSQD/DRIV. But also questionable issues like NAVR are bid up, completely neglecting the vast dilution (here at $2+). That fact is not even mentioned here.
-Consolidation processes: I consider the steep gains in the second and third tier and "IPO tier" either a alarm signal that this could be the last stage. I have no idea why it should be different now than earlier in history.
It was easy to recognize that, after YHOO AMZN and EBAY soared, the competitors must make up to some point.
-Increasing share count. Yet (as my daily Edgar watch of registrations indicates) new stock is rushed to the market at high speeds. Especially, the S-3s are up by a vast amount. It needs a lot of real money to buy that at prevailing high prices, which is not here, I suppose. Hot money is here which may leave the sector as fast as it entered.
Many people note that the prices were driven up due to the scarcity of stock, also as short covering reduced the freely available shares in the market mostly before but also during the run-up.
The theory is that shorting increases it float, as it flows stock which was not traded before as the lenders keep the stock usually and lend it.
- T/A trading, CNBC coverage. As so many people hang on to the cross 13-week average as the trigger, - and it worked in an astonishing way, discovering ONSL, COOL, BAMM, NAVR, IFLY.., that scheme was internalized and adopted quickly for prompt sucess, so far. The market may turn if that model will not work any more, or simply if there are no "cheap" stocks left to trigger.
Where to go on: It should be "safer" to short the second and third tier. Why:
-the first tier has some institutional holdings and is well covered on the options side. It has prominent analyst following and is in part contained in bigger indices. There are signs of proof for their business model in that they generate small profits and real cash.
(Therefore I always warned and refused to short the big ones).
-The second and third tier priced lots of hope and consolidation premium into their valuation.
A claim that meets the reality in few cases. Some will be taken out but more won't make it and vanish. There are no or less liquid options which may increase the market depth artificially, so the stock price is driven without the load of options attached (I came from the view that a liquid options market may actually reduce the stock volatility).
Recently the consolidation process (NSCP/AOL, CDNW/NTKI) attributed much to the buying although it is negative in the long run. I was not surprised if an ONSL or EGGS or COOL may be touted as a target soon.
"The fat lady sings when the music stops". This is the major problem here. As we have it to do with a market neglecting any sort of valuation (except sales multiples yet) we do not know to what amount. There is no way to say, multiples are too high we cannot say to high by any amount.
External effects: Recently on the Final Frontier thread and by Roger Babb, questions about an intervention on the hot money loan side towards a calm of the frenzy are to see. There are indications that the margin requirements want to go up, thus limiting the amount of hot money by day traders and mo-mo players.
I note that the marginability of stocks is reduced gradually. I have lists of no shorts and no margin at datek (which are public portfolios), which should be attributed not only at datek but to a force driving against margin trading in general to reduce the credit risk here. This could
-stop the frenzy as less money is supplied to feed the buy side.
-exacerbate the downturn as more people are shaked out due to loss of buying power holding certain stock.
As for now, stocks are hard to borrow, and nothing is sold short in big number, there will be no support by short sellers in a downturn in the terms of covering buys for a long time.
And here are candidates to sell already: BFLY, COOL, AMEN. Mall will be good to sell after the uBID IPO. I primarily tend to use the covered warrant side to box the stock, so you can lock gains easily. (BFLY and AMEN offer this opportunity yet).
But more to come and some fine analysis of buying support at intermediate "low" prices may suggest good candidates.
Timing should be watched and are there were daily "up" gaps, it is good for the short side to enter once they diminished. They should diminish, soon.
C. |
