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  1. Home
  2. / Investing
  3. / Technology

GoPro and Yelp Are Good 'Chicken Shorts'

Cautious investors can use puts or put spreads with these names.
By TIM MELVIN Apr 07, 2016 | 12:00 PM EDT
Stocks quotes in this article: GPRO, YELP

I never short stocks, as the biggest losers I've seen have been people who do so with lots of leverage and get wiped out. But I've done some "chicken shorting" over the years using puts and put spreads, and GoPro (GPRO) and Yelp (YELP) look like good candidates for that.

Both names have been on the list I pen around New Year's Day of stocks to avoid (click here and here for examples).

I create my annual rundown by using the simplest combination of value and momentum, looking for stocks that have high earnings multiples but underperformed the S&P 500 over the previous month. To me, such stocks are losing investor support -- and could have a long way to fall because of their high multiples.

Let's look at GoPro and Yelp in greater detail:

GoPro
I wrote when GoPro went public in 2014 that the company, which makes digital cameras and photography accessories, would be a fantastic short at some point. I've suggested selling GPRO several times since then, and the stock still seems like a good sales candidate when I look at it today.

After all, GoPro's trailing P/E is around 50 and analysts expect the company to lose money next year. And given that GPRO basically sells a camera on a stick, there are few barriers to entry and competitors can easily replicate the company's products.

Someone recently suggested to me that GoPro might be a good buyout candidate. That's always a possibility, but it doesn't make much sense to me given GPRO's current $1.7 billion market capitalization. I'm pretty sure that anyone with $1.7 billion could simply start a rival company and get a camera on a stick to the market themselves.

I first suggested selling GPRO back in January 2015 when the stock was trading in the $50-$60 range. But even though the name is now down to around $12 a share, it still looks like it can fall further from here.

Yelp
My wife and daughter love online rating guide Yelp.com and use it constantly to find places to eat, drink, shop or do just about everything else in life. But I detest it, as I'm more of a "Let's Drive Around and Find Something that Looks Good" type.

I also think that while Yelp isn't a bad product, it has plenty of competitors and there's nothing that strikes me as particularly special about it when compared to rival rating services.

Yelp will also likely lose money this year and next year, and I just don't see much value in the stock. I first suggested selling the name back in March 2014 when it was trading in the $60 to $90 range. Even though the stock has fallen to about $20 since then, I don't see anything that changes my mind.

The Bottom Line
An old friend who's far more aggressive than I am suggested after reading my column yesterday that if I'm so bearish, I should be net short on stocks. I reminded him that it's not so much that I'm wildly bearish, but that I can't find enough good stocks right now to justify being bullish in anything other than community banks.

Still, I'm quite cynical about the current market. I'm also mindful of billionaire investor Seth Klarman's famous suggestion that "when stocks are rising for no better reason than that they have risen, the greater fool is at work."

But I never short stocks outright, as that's the ultimate "widowmaker" to me. After all, those who are wrong on the short side are theoretically exposed to unlimited losses.

To me, the key to being a long-term investor is to survive into the long term. So, anything that can cause you to be carried out of the arena on your shield strikes me as a bad idea. That's why I only use "chicken shorts," and why I prefer put spreads to outright long-put positions.

I view chicken shorting very much the same way I see my occasional trips to the track. It's not part of my core investment strategy, but I'm willing to lose some money before I make a trade. I also try to find setups with 3-to-1 risk-vs.-reward ratios so that I can break even by simply "winning" on at least one trade in three.

GPRO and YELP have long been candidates for such trades. In my next column, I'll run down some new chicken-short contenders as well.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Melvin had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Technology

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