The typical way individual investors attempt to grow their savings in the stock market is by buying and holding common stocks over long periods of time. Indeed, there exists large profit to be made for diligent investors who regularly scan the market looking for undervalued stocks to buy up on the cheap and then hold in expectation of substantial share price increases.
However, investors who follow a long-only investment strategy, can only profit making trades on stocks that increase in price. They've lost the opportunity to profit from stocks that decrease in price.
Don't Sell Your Returns Short
In order to maximize their profit potential, savvy investors know to search not only for attractive long positions to enter in to, but potentially lucrative short-selling opportunities as well. (To learn more, check out Investopedia's Short Selling Tutorial.)
Theoretically, opening up your investing strategy to include short positions, as opposed to only long positions, doubles the amount of potential profitable stock trades you can find. For example, suppose there are 6,000 stocks listed on the NYSE and Nasdaq exchanges. If you are a long-only investor, then you have 6,000 potential profit opportunities from which to filter down to your best picks.
However, if you are willing to perform both long and short trades, you now have 12,000 potential profit opportunities to use in search of your best bets to make. Especially during bear markets, this advantage can prove critical and can go a long way to helping you beat the market.
Your Monday Short Stack
With that in mind, how can investors determine which stocks will fall in price going forward? Unfortunately, there is no crystal ball, and any number of different analysis techniques can potentially signal that a stock may be set to decrease in price.
However, as a general rule of thumb, stocks that have already been trending significantly downwards over a one-month period of time, and are expected to produce negative EPS growth for the current year are good places to start looking for short sale candidates. Here are five stocks that fit that bill:
|Company||Est. Annual EPS Growth*||4-Week Price Change|
|American International Group
|Las Vegas Sands
|Data as of market close July 3, 2008.|
|*Current fiscal year\'s estimate vs previous year.|
USG Hits the Wall
USG, the manufacturer of gypsum wallboard, seems to have run into as wall itself as of late. The company successfully emerged from bankruptcy proceedings in 2006, only to almost immediately fall on hard times once again due to the U.S. housing market crash.
Difficult industry conditions have led the Wall Street analysts consensus estimate for its 2008 fiscal year EPS to be a troubling loss of $1.36 per share. For its full year 2009, the expected results are a little better, but they're still bleak - a loss of 78 cents per share.
As of the July 7, 2008 trading day, the stock has just recently fallen below its previous 52-week low of $26.70. With such ugly fundamentals and expected future earnings, can USG's downward momentum continue long enough to make it a good short play? Be sure to join me (ChrisGallant) in the FREE Stock Picking Community to share your thoughts and see what other investors are saying.