Short sale ideas

Warning: The following does not constitute advice. There are a number of risks inherent to short sales beyond normal stock investing. There are risks to investing in stocks. The market is volatile and could trigger a margin call, forcing an investor to realize a loss that might otherwise turn to a gain in time. The biggest risk is that some of these stocks may simply magnify market performance, and the market could turn positive.

As of September 30, 2011, the following companies appear to present an opportunity to profit by selling their shares short.

Bombardier (BBD.B) – The last three months have been extremely painful for holders of Bombardier shares, which lost 40%, while the market lost only 13%. The shares appear very cheap relative to earnings, so the future price movement will depend on future earnings announcements. If earnings are positive, the shares could recover rapidly (eg. they are up 8% between Sept 30 and Oct 7); if earnings are negative, the low stock price would be justified.

First Quantum Minerals (FM) – First Quantum shares have performed almost exactly the same as Bombardier. However, the current week has been better to First Quantum, which has risen 16%. This may be an example of a high beta stock, which will produce strong positive returns as the market turns positive, especially since it’s a commodity producer.

Inmet Mining (IMN) – Inmet has been slightly less volatile, falling only 30% in the last three months, including the recovery of 12% in the current week. Inmet shares are extremely inexpensive relative to their earnings, which makes this a dangerous stock to sell short; bargain hunters may begin to buy it up.

Research in Motion (RIM) – This company has gone from a darling to a dog of the market. The share price has fallen 55% in the last six months, compared to -18% for the market. It appears that investors have lost faith in the company’s ability to innovate and compete. RIM appears cheap, all right, but no one expects those earnings to last.

Teck Resources (TCK.B) – The shares of Teck rose from under $4.00 in early 2009 to over $60 in January 2011. Since then, the share price has dropped back to $33, where there seems to be a lot of support.

Yellow Media (YLO) – This is a company I’ve never felt comfortable with. I think I just hated that they would dump their dead-tree directory on my front porch and expect me to haul it off to recycling. They’ve also made some serious M&A missteps recently. Which probably explains why the price is going toward zero. The distribution has been stopped, so it’s now easier to sell short, but there’s not much room to go down from $0.22.

After putting forward all those ideas, I realize why short selling goes against my nature. My experience is as a value investor, so when stocks are going down, I’m thinking: “This is a bargain”, rather than “This is going to go further.” So it’s an interesting exercise to try and see it from both sides.