Three Companies to Short Into 2013

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As a value investor I typically do not short stocks. In fact, there have only been a handful of times in the last 10 years that I have shorted a stock. However, as we head into 2013 there appear to be stocks that are so apparently overvalued that a short position seems almost too attractive to pass up. In this piece I am looking at three of these stocks, the most obvious of them all.

Two Short Plays That May Be a Surprise

The first two are very similar businesses and are showing all the signs of a downtrend. In fact, I call both companies the next McDonald’s, because both have been aggressively acquired by funds and have moderate growth to support excessive valuations for large cap stocks. The two companies I am referring to are Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW).

Both companies are trading with higher price/earnings multiples than they were during the housing boom, and these valuations are due to speculation, not fundamentals. Furthermore, both companies have done a great job at becoming more efficient and squeezing higher profits out of moderate revenue growth. However, at some point revenue must grow to support the valuation, and in this market, I don’t see it happening.

It appears the short rally has already begun for these two stocks, as Home Depot has lost 6.21% and Lowe’s 2.07% in the last month. It is the first time that either have underperformed the market in the last year, an indication that funds and investors are preparing to short into 2013.

One Short Play That Should Be No Surprise

My next most obvious short is Linkedin (NYSE: LNKD), because its valuation makes Facebook (NASDAQ: FB) look like a value play. To put into perspective: Social media is all about users and social engagement, but Linkedin has less than 90 million users (9% of Facebook), yet is worth 21% as much as Facebook. Furthermore, Facebook is diversified with its business, and could still evolve into the next Google because of its presence. Facebook has multiple revenue producing services that are just beginning to launch; meanwhile Linkedin does not have this luxury because it’s grounded to only one area of focus.

The numbers simply don’t add up. Linkedin is a business/career based platform and already we have seen its growth slip below the 100% year-over-year level. Now, with $836 million in revenue, Linkedin’s growth has begun to slow because it has squeezed as much revenue as possible from its 90 million user base. This is a company with a price/sales ratio of 14.65 and a P/E ratio of 733.70, meaning it would need several years of 100% year-over-year growth just to be fairly valued. Unfortunately, growth is slowing, and in 2013 Linkedin will finally come down to earth, because it’s worth about $55.00 and eventually the market does correct overvalued stocks.  

Conclusion

After looking at the valuations of all three companies, I am not sure how an investor could look at the fundamentals and metrics then determine that any are a value investment. I think both Home Depot and Lowe’s are great companies, but they are too expensive. Linkedin has been a great investment for investors, but more so than any other stock, its valuation is unexplainable. Therefore, I think all three are prime candidates to short heading into 2013.


BrianNichols has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, The Home Depot, LinkedIn, and Lowe's Companies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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