A Longer-Term Shorting Idea in Tiffany & Co. (TIF)

09/15/2009 12:01 am EST

Focus: STOCKS

Michael Shulman

Editor, Short-Side Trader

There are several reasons why I like Tiffany & Co. (TIF) as a long-term shorting opportunity. For starters, the company saw a 16% drop in revenue last quarter, including a 27% drop in the United States, despite 15 new store openings. And the stock is overvalued and overbought after an 11% pop last month.

But the main reason I think you should short TIF is the consumer. Or, should I ask, "What consumer?" Consumer confidence is falling again, unemployment is rising, and income is falling. What's more, credit lines are evaporating—as much as $2.7 trillion in credit for consumers may disappear this year. Ever see people buy anything at Tiffany with cash?

In addition, rising gold, silver, and platinum prices will make the company's products even more expensive and harder for people to afford. During the past few days, the stock has risen because the value of the company's inventory has theoretically risen. Eventually, though, the rise in precious metal prices will be felt in the store, dampening already weak demand.

This is not a short-term trading idea. The market is going up right now and taking everything with it—even the weakest companies and worst stocks. Rather, this is a fundamental short based on what is happening and what will happen in the real world, because we are not even close to being out of the woods yet.

If you want to short Tiffany & Co. (TIF) right now, you are just going to have to deal with an up market and foolish optimism about consumer spending. But, this too shall pass. So you're best bet is to look at the put options with the furthest out expiration date, the January 2011s. The stock is currently trading around $36, but I think there's a good chance it could be half that by 2011.

By Michael Shulman of OptionsZone.com

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