As you know we are undergoing a nasty rotation in the stock market out of the recent high flyer stocks into safer assets, dividend paying stocks, Bonds and Gold.
Some of the pullbacks in point values have already been large, for example TSLA is down nearly 30% from its all-time high set back in February of 2014. Are these stocks done going down, or do they have further do go on the downside?
Consider the fact that the PE for the average stock in the SP-500 is 18. Above is a scan of stocks with prices over $100, and a PE over 100 along with the 5-year earnings growth rate. Earning growth rate is important because the market will pay up for high growth rates, and if the 5-year earnings growth rate is 50% (for example), it might make good sense to pay up to 100 time earning for a stock.
But what if the 5-year earnings growth rate was negative? What if the company was actually losing money, or just not making very much to justify the outrageous value of the shares? Out of this list comes some of my favorite short candidates, stocks which I think have a lot further to go to the downside. Tops among these are AMZN and NFLX and LNKD.
What about stocks with no earning whatsoever, no PE Ratio? I ran that list and came out with the following. Favorite shorts on this list are ICPT, and of course TSLA.Be careful trading these markets since they can have sudden, short burst of short covering, usually to the top of the declining price channel.
When that happens, be prepared to sell call credit spreads or buy directional puts, with a delta 7 or higher.
Have a great week ahead.
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