Most investors go long or purchase stocks in the hope that the share prices of their holdings will rise, leading to a profit. However, going long isn't the only way to make money in stocks. In fact, there are many investors out there who focus their efforts on researching and shorting common stocks. By definition, these are investors who will make money if the share price of the company in question declines in value. (For more on this concept, be sure to check out our Short Selling Tutorial.)

To be clear, there are many different methods that short players may use to analyze stocks and to select a stock to short. They may look specifically at cash flow or earnings trends, or ponder book values in proportion to current market prices. Some may also rely on technical analysis.

Stocks that have already been trending significantly downward 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 Name % Price Chg. (4 Wks) Current Price Market Cap (millions) Est. Annual EPS Growth*
American Greetings
(NYSE:AM)
(29.51) 6.02 273.38 (56.5%)
Comerica
(NYSE:CMA)
(11.6) 16.23 2442.39 (64.8%)
Dow Chemical
(NYSE:DOW)
(20.32) 15.76 14558.77 (31.1%)
Harley Davidson
(NYSE:HOG)
(12.78) 14.13 3289.8 (18.7%)
J. Crew Group
(NYSE:JCG)
(17.84) 9.58 598.57 (46.8%)
* Current fiscal year\'s estimate vs. previous year
Data as of January 14, 2009, intraday

Let's take a look at some of the stocks on this list, beginning with Harley Davidson. With the economy on the ropes, many people are having trouble making ends meet. As a result, the demand for big-ticket items has slackened, leaving the near-term outlook for shares of Harley Davidson less than rosy.

The company is coming off a less-than-stellar Q3. In the period ended September 28th, the company reported a profit of 71 cents per share, which wasn't so hot given that in the comparable period in the prior year it put up $1.07 a share. On the revenue side of the coin, things could have been prettier as well. The company generated a top line of about $1.42 billion versus roughly $1.54 billion in the comparable period the year before.

And lately, the company hasn't been receiving a lot of love from the Street. According to a January 12 report in the Journal Sentinel, Goldman Sachs analyst Patrick Archambault downgraded Harley shares from "neutral" to "sell" and slashed his target price by $19 to $11. In addition, an RBC analyst reportedly lowered his price target on the shares from $30 to $16. It is moves like these that may keep some investors from hopping aboard in the near-term.

On the earnings front, the company is expected to earn $3.04 in 2008 and $2.49 in 2009. I think that this expected downward trend may be a turnoff for some fence-sitting and existing investors.

On the flip side, I don't want to count the company out for good because it turns out a good product, and it's still expected to produce earnings of about $2 per share in 2009. Finally, an insider purchase by HOG director Barry K. Allen in November of 2008 is a promising omen for where this stock's headed in 2009. (Read Delving Into Insider Investments to learn more about the clues these purchases can provide to you.)

Bottom Line
Stocks that have been on the decline over the past month and are expected to produce negative EPS growth for the current year are good places to start looking for short sale candidates. I plan to keep a close eye on the Harley Davidson company because over the long run, I think it has promise. That said, in the near-term I do see some downside potential from current levels, which could make for a great opportunity for short sellers.

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