Dream the Unshortable (Stock) Dream

By Fil Zucchi  JUN 06, 2012 12:10 PM

Some stocks simply can't be shorted; others are begging to be. Lululemon and Facebook are on Zucchi's list.


MINYANVILLE ORIGINAL Tempur-Pedic (TPX), Fossil (FOSL), Green Mountain Coffee (GMCR), Decker’s (DECK), Abercrombie & Fitch (ANF), Ubiquity Networks (UBNT), Netflix (NFLX), and the homebuilders earlier this decade are just a smattering of stocks that begged to be shorted while they doubled and doubled again on their way to valuations completely disconnected from their businesses and, in some instances, despite their business. 

They are what I’ve called in the past the “unshortable shorts,” which are stocks that any market watcher categorically knows will crash and burn. There’s a mantra in the market that “you cannot short valuation alone,” but that idea often ignores the fact that some industries simply do not allow participants to gain the type of competitive advantage that justifies premium multiples.  Retail, in my humble opinion, is the poster child industry, but there are others, such as commoditized technologies, and even commodities.

Shorting a stock because its valuation bears no rational connection to the prospects for its business is not just shorting “valuation” -- it is shorting a business that ultimately can only grow at rates around the lowest common denominator in its industry.  That to me is a fundamental short as much as a valuation short.

And yet for all the examples out there of stocks that disintegrate in a matter of weeks from cult-like highs built over periods of months and years, traders continue to push those stocks up in relentless fashion, taking their chance that they can get out before the implosion, and in the process making grown bears cry, if not cry uncle.
There was a more foolish time when I used to be all over these types of names, only to lose sleep and money over them.  Now for the most part, I just watch them in a “blood sport” kind of way.  On my list of future demises are Lululemon (LULU), Under Armour (UA), Facebook (FB) (no one except insiders even got the benefit of the ramp up on this one), Whole Foods (WFM), and perhaps the most obvious one in a long time, Chipotle Mexican Grill (CMG).  The last one is so absurd that it has actually dragged me into with a “just for fun” size position in deep-in-the-money put LEAPs (or long term equity anticipation), against which I regularly write weekly out-of-the money puts. Please re-read the operative words in the last sentence – “just for fun.”  For the rest, I’ll just dream the unshortable dream.

Editor's Note: At Minyanville we often argue that markets and stocks are driven by four primary attributes: the fundamentals, the technicals, the structural, and psychology. In this weekly piece, trader Fil Zucchi will attempt to digest these four measures to come to actionable recommendations, but with a couple of twists: Rather than relying on standard technical analysis, he will examine the technicals through the lenses of “DeMark” indicators. And rather than highlighting straight entry and exit points for stocks, he will use options to gain long / short exposure, control risk, and generate cash flow. Investors should note: This column will be written 1-2 days prior to publication, so by the time it appears the prices of the securities mentioned may have changed.
Position in CMG

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