Short sellers are well-positioned to profit in the current bull market, where heavily shorted stocks such as Shake Shack Inc. (SHAK), J C Penney Company Inc. (JCP) and Under Armour Inc. (UAA) offer opportunity, according to The Wall Street Journal. While the bull market in the Standard & Poor's 500 Index (S&P 500) reaches its eighth anniversary this week, volatility has declined and correlations have also started deteriorating. That's providing an ideal environment for short sellers, who borrow stock and sell it with plans to buy it cheaper at a later time. (See also: What is the average annual return for the S&P 500?)
Lofty Stock Valuations
Trip Miller, managing partner of long-short hedge fund Gullane Capital Partners, LLC, told Investopedia that since valuations are so high, it is easier to find short situations than long ones. "We are having an easier time finding short opportunities," he said in an interview.
Considering The Fundamentals
When evaluating companies as potential short trading opportunities, investors can benefit from carefully considering the fundamentals, Miller told Investopedia. While a sharp drop in a stock might create a brief bounce where investors can make a profit, Miller says they should ask other questions such as: how relevant will a company be 25 years from now, and how will J C Penney, for example, compete with Amazon.com, Inc. (AMZN)? Miller's fund considered shorting J C Penney, but decided against it. (See also: Fundamental Analysis: Introduction.)
Miller also asks about the strength of the company's brand. His team is looking into Under Armour Inc. as a potential short, and he emphasized that this company has a branding problem. When his team polled people between the ages of 18 and 25, Under Armour just wasn't the cool brand.
One more factor will help create a strong environment for shorting opportunities in the current market. Because of the breakdown in correlation, individual stocks are more vulnerable to specific, negative news events. The correlation of S&P 500-listed stocks dropped to its lowest point in more than 15 years during February, according to figures provided by S&P Dow Jones Indices and reported on by the Journal. When the stocks contained in the broader indices stop moving in tandem, this affords greater opportunity for short sellers to pick the companies whose shares will decline.