The Shorts Have It!

09/08/2006 12:00 am EST

Focus:

Jamie Dlugosch

Editor, The Rational Investor

Market volatility sometimes provides an opportunity for investors to profit on the long or short side of investing. Here, Jamie Dlugosch highlights a couple of technology companies whose stocks appear ripe for price pullbacks…

 

“For investors familiar with the risks of short selling, short-selling can be a good way to hedge against potential market declines and downside in your portfolio or to speculate for profitable trades in any market environment. For investors who already own these stocks and are less experienced or aggressive, my recommendations are also stocks that you can simply sell. It's up to you which way to use them—as normal sells or as short sells.

 

“Digital River (DRIV NASDAQ) provides Internet outsourcing for software and high tech product markets. DRIV has been quite successful in building its business, and it is one of the survivors of the dot-com boom and bust. But the company is more than fairly valued, and I question future growth prospects. Recently the stock has been buoyed by speculation that it will be acquired by a larger Internet player like Google or Microsoft. Shares trade for over seven times sales, 3.5 times book value, and over 32 times trailing earnings. That's too rich for my blood, especially at a time when the economy is slowing. From a technical standpoint, shares have made the round trip between 45 and 25 twice. I think the third time will be the charm. I recommend selling or short selling DRIV immediately. My target on DRIV is $30.

 

“Earlier this week, Wall Street came out with a downgrade of the financial services sector. With a slowing economy, expectations for a decrease in trading and underwriting activity, financial services firms could show weaker revenue and profits in the near term. Advent Software (ADVS NASDAQ) is highly levered to the financial services industry. The company provides portfolio accounting software and has done quite well during this most recent bull market. Shares trade for 72 times trailing earnings, over five times sales and over five times book value, expensive no matter what the growth prospects are. The time to buy ADVS is after a protracted bear market. Selling at the end of a bull market then makes the most rational sense. I recommend selling or short selling ADVS here. My target for ADVS is $20.

 

”At the moment I would recommend that up to 10% of a portfolio be allocated to short sales. I am cautious on the market at the moment, and hedging long recommendations with these shorts can protect us from an unexpected drop in equity prices. That does not mean I expect a crash, but I do think it pays to be conservative at the moment.”

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