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LinkedIn Poised to Drop?

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The fundamental and technical stories for LinkedIn are both saying the same thing.

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Last night Zynga (ZNGA) tanked, dragging down Facebook (FB) with it. There's been a lot of hype regarding everything social, but not exactly a lot of follow-through regarding earnings. Recently a new member of our team at TTT, Brennan Basnicki, put out a fundamental piece on LinkedIn (LNKD) that I think merits a good read-over as it is applicable to many of the high-flying tech stocks we've seen get absolutely crushed lately. Further, if we look at some more of the fundamentals and technical indicators, I think we may have found a prime shorting candidate.

On the fundamental side:
  • A P/E roughly at 700. This is astronomical. While not alone a reason to short a stock, it definitely has to raise caution to the long side.
  • Heavy insider selling: Management has sold more than 20% of its pre-IPO ownership while the early venture capital firms have already exited half their positions.
  • Net profit margins are very low, ranging between 4% and -1% over the last five quarters.
  • Rising sales, general, and administrative costs with decreasing growth in revenue.
On the technical side:
  • This is an interesting one. We currently see an extended uptrend that entered a consolidation period over the last three months. While a consolidation after an uptrend is typically a continuation pattern, a closer examination leads me to believe that LinkedIn will, or already has begun, to breakout to the downside.
  • There is also a very clear double top formed that will act as resistance. The one pop above it failed to hold, which often means a reversal is likely to follow.
  • Moving averages are all aligning in the same direction: Down.

Click to enlarge

  • We can also take the perspective that the recent price action has been a bear flag, not so unlike the rest of the equity markets. Notice the recent rise in price on lower volume, followed by an increase in volume over the last two days accompanied by lower prices. These are clear signs that a breakout may be starting.
  • Further, take a look at the heavy selling on the first significant pullback in May. This looks to be a large distribution and it is likely that some of the insiders are taking advantage of the loft stock price.

I don't typically advocate positions on single stocks as you're always prone to news events and whatnot that can have serious implications. That being said, the fundamental and technical stories, both seem to point downwards on LinkedIn. With a beta of 1.6, the direction of the market will likely be the single most important factor for LinkedIn up until its 2012 Q2 earnings announcement on August 2. Also keep in mind that if you do enter a short to keep a stop in , I would be cautious taking any position during the earnings report. LinkedIn is very volatile and has already caused a lot of shorts quite a bit of grief. That being said, the timing may finally be right. If you're looking for a little more action, maybe take LinkedIn short on one of our next short plays.

Editor's Note: Chris Vermeulen offers more content at his sites, TheGoldAndOilGuy.com and Traders Video Playbook.
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No positions in stocks mentioned.

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