The current market conditions have set some stocks up to be the perfect short sell candidates. When overall market weakness is combined with already suffering stocks, it’s the ideal time to short.
We have identified 3 struggling stocks that have set up to be textbook perfect shorts within the present market weakness.
First, let’s take a look at how to profit from the overall market weakness.
Buying weakness and selling strength is the mantra of professional traders. In fact, we have written about this fact many times over the years.
Following this mantra has created tremendous wealth for those investors wise enough to know when to use the rule.
While the “buy weakness, sell strength” rule works like a miracle in fundamentally and technically strong stocks, it can be a big mistake with weak stocks in weak markets.
There are 3 primary ways to profits from weak stocks and weak markets.
The ways are shorting, options, and inverse ETFs. Let’s take a closer look at each of these techniques of profiting from weakness.
- Shorting Shares
The most common way to profit from a stock’s decline is called shorting.
Shorting means is to place a trade with the goal of price falling rather than appreciating.
I know it sounds complicated but it’s actually quite easy.
The way shorting works is your broker loans you the shares at a certain price. The goal is to sell the shares back to your broker at a lower price and you get to keep the difference between the loaned (short) price and the price that you sell the shares back to your broker.
Selling the shares back is called “covering”. Shorting can be done with individual stocks or ETF’s.
An ETF such as the SPDR S&P 500 (NYSE:SPY) can be shorted to participate in broad market sell-offs. You need to have a margin account and be approved for short selling at your broker in order to sell short.
- Options
While there are all kinds of different option strategies for a wide variety of stock market conditions, buying a put is the simplest way to profit from a decline.
A put option is a bet that the stock or ETF will fall in price within a certain time frame. It climbs in price as the share price drops.
Buying a put limits your downside risk to the price you paid for the option. However, puts are very time sensitive. This means that not only does the underlying share price need to drop, it needs to drop within the lifespan of the put.
Most puts expire on a monthly basis and they all decrease in value as the time to expiration draws closer. Puts are highly effective tools for betting on a particular known event’s effect on price. If you believe that the earnings will be bad for a particular stock, buying puts to benefit from the anticipated price drop makes sense.
Investors can also sell calls in anticipation of a stock’s decline. The benefit of selling calls is that the investor profits from the time decay. In other words, time works for you rather than against you as it does as a put buyer
- Inverse ETF’/s
Inverse ETFs are another way to profit from overall declines]
Fortunately, as investors, we don’t need to fully understand the mechanics of how inverse ETF’s actually work. Our job is just to understand how to use them for maximum profit. Inverse ETF’s are available on a variety on underlying stock indexes. There are even inverse ETF’s that are leverage up to three times on the underlying index. In the most simple terms, 3X leveraged inverse ETF’s move 3 points for every single point the underlying index moves.
Non-leveraged inverse ETF’s can be bought and held just like any stock. They are ideal for catching long term down trends in whatever the underlying instruments.
Here Are 3 Stocks To Short Now
These 3 stocks make ideal candidates to profit from the downside whether by options or shorting directly.
- Barnes & Noble (NYSE:BKS)
This brick and mortar book seller may be on its final gasps of breath. Both online and store sales have been steadily dropping. Even the company’s foray into digital delivery and readers is suffering. Digital content and Nook sales were down 26% over the holiday season!
Barnes & Noble, Inc. is a retailer of content, digital media and educational products. The Company’s segments include Barnes & Noble Retail (B&N Retail) and NOOK. The Company is a content, commerce and technology company, which provides access to trade books, textbooks, magazines, newspapers and other content across its multi-channel distribution platform. The Company’s principal business is the sale of trade books (generally hardcover and paperback consumer titles), mass market paperbacks (such as mystery, romance, science fiction and other fiction), children’s books, eBooks and other digital content, textbooks and course-related materials, NOOK and related accessories, bargain books, magazines, gifts, emblematic apparel and gifts, school and dorm supplies, cafe products and services, educational toys and games, music and movies direct to customers through its bookstores or on barnesandnoble.com. The Company operates approximately 648 bookstores in around 50 states
We expect this company to eventually go the way of its old competitor Borders. Competition from Amazon and Apple are simply too strong for this old school retailer to survive for much longer.
- 3D Systems (Nasdaq:DDD)
3D printing stocks were the biggest hype stocks for quite some time. Now the market is saturated and the leaders in the business are getting hurt.
3D Systems is leaving the consumer market and faces massive competition. Not to mention, a start up called Carbon3D has unveiled a technology that is up to 100 times faster than the current state of the art.
The Company is a provider of three-dimensional (3D) printing centric solutions. It provides 3D design-to-manufacturing solutions, including 3D printers, print materials and cloud sourced custom parts. Its healthcare solutions include end-to-end simulation, training and planning and printing of surgical instruments and devices for personalized surgery and patient specific medical and dental devices. It also provides software and haptic and perceptual devices for design, including 3D digital design, scan-to-computer-aided design (CAD), scan-to-print, reverse engineering, inspection, sculpting and medical modeling and simulation applications. For its healthcare customers it also offers virtual surgical planning and medical modeling services, digitizing scanners and simulation products. The Company operates in the Americas, Europe, the Middle East and the Asia Pacific regions.
Shares are down 76% over the last year and over 18% this year alone.
- Apollo Educational Group (Nasdaq:APOL)
This is my favorite short out of the three. For profit educational institutions are up against heavy headwinds.
The company describes itself as a private education provider. The Company offers undergraduate, graduate, certificate and non-degree educational programs and services, online and on-campus, principally to working learners in the United States and abroad. The Company’s segments are University of Phoenix, Apollo Global and Other. The Company’s University of Phoenix segment offers undergraduate and graduate degrees through its nine colleges in a range of program areas, as well as various non-degree programs. The Company’s Apollo Global segment includes its institutions based outside the United States and its corporate operations. The Company’s Other segment primarily includes Apollo Professional Development, which provides relevant programs for employers to help them recruit, develop and retain a workforce, and the Company’s corporate activities
The government is ramping up regulations on the industry and student loans are becoming more difficult for prospective students to obtain.
Shares have been downward trending for the last 6 years and analysts expect earnings to drop by over 20% annually for the next 5 years.
The stock is down by 70% over the last 52 weeks but are fractionally higher in 2016.