I wrote in my last column that I've long seen GoPro (GPRO) and Yelp (YELP) as "chicken shorts" -- overpriced names that I'd consider betting against using puts and put spreads rather than shorting (which I consider too risky). Here are four other firms that I see as chicken-short candidates as well.
I've spent a lot of time over the years trying to identify overvalued stocks that investors should either avoid, sell or short (if you're very bold). I've had a fair amount of success doing so, but have also occasionally come across an Amazon (AMZN) or other "face-ripper" that just keeps on going higher and higher even though it seems like it shouldn't.
So, I've come up with two ways to avoid getting killed by shorting seemingly overvalued stocks. First, I stick to companies that have begun to underperform the broad market and might be losing institutional-buyer support. Second, I only do "chicken shorts" -- puts or put spreads rather than traditional short positions, which theoretically have unlimited loss potential.
Let's look at four stocks that I think lend themselves to chicken shorting:
This well-known online/mobile firm lets you go online and arrange pick-ups or deliveries from some 40,000 restaurants in about 1,000 U.S. cities.
It sounds like a cool idea when you first look at it. You simply pick your choice of dining options and have your food delivered right to your home of office.
The only problem is that when I called some friends in bigger cities, they said they don't use it. And my ultimate urban research tool -- my daughter and her husband in Chicago -- feel like there are too many options within walking distance in most cities to justify using a delivery service.
GRUB is also facing a potentially bigger problem in that Uber is getting into the food-delivery game. The stock is already pricey at 56x trailing earnings, and it could be headed a lot lower in the not-too-distant future.
Hyatt Hotels (H)
This is one of the world's best-known hotel brands, but at 55x trailing-twelve-month earnings, it's not cheap.
Hilton has also posted a negative earnings surprise in three of the last four quarters, which can't make its institutional-shareholder base very happy. Earnings are also down this year and will likely only grow at a single-digit percentage pace over the next few years.
Mwanwhile, a buyout of Hyatt doesn't seem likely even though there's been some recent hotel-industry consolidation. After all, there are only a handful of hoteliers big enough to consider purchashing Hyatt, and two of them -- Starwood Hotels (HOT) and Marriott International (MAR) -- are already planning a big merger.
The bottom line: I see little reason to get excited about Hyatt. Another negative earning surprise could be a catalyst for an extended decline.
Impax Laboratories (IPXL)
This pharma firm has two divisions: one that makes generic versions of prescription and over-the-counter drugs and another that sells drugs for central-nervous-system disorders (multiple sclerosis, Parkinson's disease, etc.)
It's a solid company, I could be very interested at the right price. But I think IPXL is just too expensive at its current level of around $35 a share, or 65x trailing-twelve-month earnings. Analysts have also been lowering the company's 2016 and 2017 earnings estimates, and that can scare fund managers away from a stock.
IPXL has already lost almost 20% so far this year, so some institutional investors have clearly been jumping ship. I think It would take a fairly large decline for most of them to jump back in.
This is another high-priced company that's underperforming the overall market.
I have to confess that I don't get the whole concept of using a site like TripAdvisor to plan a vacation. I usually just pick a place (or more often, my wife does), then I fly there and commence to enjoy myself.
Online travel booking is also a very crowded field, and I don't see anything so unique about TripAdvisor that would justify its current 46 trailing P/E. The firm has posted negative earnings surprise in three of the last four quarters, and analysts have been lowering their forward earnings estimates
Neither of those trends are going to make institutions excited about piling into the stock, so TRIP is likely to continue underperforming.
The Bottom Line
I want to reiterate that even with chicken shorts, I only bet a very small amount of money against overpriced stocks.
As I noted yesterday, these plays aren't part of my core investment strategy. Instead, I view them as similar to an occasional poker game or trip to the track.
And even if you don't want to bet against these stocks, at least bear in mine that there's not a lot of reason to own them at current prices.