Why You Should Short Stocks Now
Editor’s note: Today, we have something special for you. Instead of our usual market commentary, we have a brand-new interview with E.B. Tucker, editor of The Casey Report.
As you may know, E.B. sees tough times ahead for the U.S. economy and stock market. To prepare, E.B. has encouraged his readers to hold extra cash, own physical gold, and only invest in stocks that can weather the coming storm. He’s also shorting some of America’s most vulnerable companies.
Shorting is betting that a stock will fall. If it does, you make money. It sounds easy. But most investors have never shorted a stock in their life. They think it’s something only the “pros” do.
Today, we put that myth to rest. Below, E.B. explains how to short stocks…what he looks for in a short…and how to avoid mistakes most investors make when shorting stocks.
We’ll even reveal a stock E.B. is shorting right now. Casey Report readers have already made 18% on this short…but we think much bigger gains are on the way.
Justin Spittler, editor, Casey Daily Dispatch: E.B., can you explain how shorting works?
E.B. Tucker: The first step is to get a margin account. [A margin account allows you to borrow money to buy stocks.]
After that, it’s fairly simple.
Let’s say you want to short one share of tech giant IBM. To do this, you would actually have to borrow one share from your broker. You would then sell that share on the marketplace. If IBM is trading for $100, then $100 will land in your account when you sell it.
Now, let’s say IBM’s stock falls to $90. You decide to pocket this 10% gain. To close this trade, you would buy back one share of IBM [buy to cover] and return it to your broker. You keep the $10 profit.
JS: Easy enough. Why should investors short stocks?
E.B.: Shorting can protect you from market declines.
If stocks crash, the payoff can be huge. If they don’t, you only lost the cost of being protected. It’s like buying insurance.
JS: A lot of investors think shorting is a “sophisticated” strategy. Is that true?
E.B.: Shorting isn’t just for sophisticated traders. Anyone can do it.
But you better have a strategy…
Let’s say you own 10 stocks. If this were my portfolio today, I’d have seven “longs” and three “shorts.” [A long position is a bet that a stock will rise.]
Right now in The Casey Report, we’re long world-class companies that can make money no matter what happens to the economy. On the short side, we’re betting against stocks that will get clobbered during a market correction. [More on those stocks in a second…]
Having essentially 30% of the portfolio dedicated to shorts means we’re looking for the market to decline right now.
JS: What are common mistakes investors make when shorting stocks?
E.B.: Most investors don’t think to buy insurance until it’s too late. By then, they’ve already lost a lot of money.
It’s also “expensive” to short stocks when everything is falling. It’s like trying to buy flood insurance for your beach house when a hurricane is about to make landfall. Sure, someone might sell you insurance, but you’re going to pay a fortune for it.
JS: So, when is it a good time to short stocks?
E.B.: I like to short stocks when the market is red hot.
When stocks are up big, investors become less disciplined. They overlook problems that would normally scare them away.
The higher stocks climb, the more investors throw caution to the wind. After all, it’s human nature to think the good times will never end.
Eventually, companies can’t live up to the market’s unrealistic expectations. You see, the stock market “prices in” the future, meaning the price of a stock reflects how much money investors think a company will make tomorrow, next quarter, or next year.
Sooner or later, some companies will disappoint investors. When that happens, look out below.
JS: So you like to short expensive stocks?
E.B.: It’s not that simple.
You see, a lot of investors get carried away shorting. They’ll look for the next high-flyer and try to call its top. That can be dangerous. Shorting a stock because it’s “overvalued” is very difficult.
Just look at Amazon (AMZN). It trades at more than 140 times future earnings. That’s off the charts. But the stock made a new high today.
Amazon’s been expensive for years, and all it’s done is keep rising. That’s because it’s one of the most dominant companies on the planet.
In other words, you shouldn’t short a stock just because it’s expensive. After nearly two decades of active investing, I’ve learned to avoid that strategy completely.
I like to short companies that are dependent on a certain customer or economic situation that I expect to change. If my assumptions about changing economics are right, a company’s valuation today might be irrational and set to decline sharply.
JS: The U.S. stock market looks very fragile right now. Is now a good time to short stocks?
E.B.: Stocks have been rising for almost eight years. Corporate profits have been falling since 2014. And many key economic indicators, like the Purchasing Managers’ Index, are flashing warning signs.
So, yes. It’s a good time to short.
Surprisingly, most investors are still fully committed to stocks. They haven’t set aside enough cash. And they certainly aren’t shorting many stocks.
If stocks start falling, these folks could take heavy losses. But since we have three open short positions, Casey Report readers should make money no matter what direction the market heads.
JS: Can you tell us about a stock you’re shorting right now?
E.B: One company we’re shorting is Signet Jewelers Ltd. (SIG). The stock hit a 52-week low yesterday.
Signet is one of America’s biggest jewelry store chains. It owns jewelry brands you’ve seen at your local mall, like Zales, Jared, and Kay.
These might be household names, but don’t confuse Signet with Tiffany & Co (TIF), which caters to a higher-end customer who often pays with cash.
Signet serves the average American, and more than half of its customers buy on credit. That could turn into a big problem.
As the economy worsens, unemployment is going to tick higher. More and more of Signet’s customers will fall behind on their payments. Eventually, Signet could have to slash prices to move its inventory, meaning it could make less money on every wedding ring it sells. Signet’s business could completely derail.
In a way, this is already happening.
From 2014 to 2016, Signet’s annual bad debt expenses rose from $138 million to $190 million. That’s a 30% increase. Over the same period, credit sales grew by only 20%. That means bad debt expenses rose 50% faster than credit sales.
Signet’s stock is already down 18% since we shorted it in June. But it could go much lower if the economy hits a soft spot like I expect.
We’re also shorting a major airline in The Casey Report. This stock could plunge 50% or more before all is said and done. And we’re shorting a major health insurance company that could unravel as the Obamacare boondoggle implodes.
These shorts should hand Casey Report readers huge gains if the market tanks. We will then use this cash to go shopping when everyone else is stunned and confused.
Editor’s note: As you may remember, U.S. stocks began the year on a rough note. The S&P 500 plunged 11% over the first six weeks before recovering. According to E.B., the brief downturn was “only a warning.”
In this short presentation, E.B. talks about a major financial crisis on the horizon. As you’ll see, this coming crisis has already quietly begun in an “overlooked” part of the global financial system.
The good news is that you can still prepare. At the end of this video, you’ll learn how to access E.B.’s top ideas (including his three shorts). Click here to learn more.