Herbalife

OK, if you are a fan of the stock market, you have been following the soap opera of Bill Ackman and Carl Icahn over Herbalife.  In short, Ackman is a bear that believes Herbalife is a scam, and Icahn thinks there is value.

But the real story is that Icahn and Ackman dislike each other personally over a bad deal from 10 years ago.  Fine, whatever, two giants fighting over a company.  As Josh Brown says, two Gods fighting above us, or as I say, Godzilla vs. Megalon.  As a small investor, they may not care about you, but you might get trampled if you get in their way.

So, don't overdo it, but my recommendation is to watch this stock slowly implode.  If you want to see the winner, don't look at what happened today.  Today the stock jumped 10 points after hours when Icahn raised his stake.

Look at the price over the last few months.  Before Ackman made his short known, the stock was in the 50s.  It dropped to around 25 and is now after hours around 47.  When did Icahn buy?  I would bet he averaged in when the stock was on the lower end of the range.  He had plenty of opporunity.

Do you think it is going back to the 50s again?  I don't.  I think it will pop up to something below 50 and slide back down, once all the headlines are done.

Ackman will have made his money, and Icahn will be able to get out with a winner too.  The people who followed them in late will get hurt.  And the big boys can share a laugh at all the small time losers.

Best Buy and HHGregg

Every so often, there is a substantial change in the environment that upsets the status quo.  Climate change kills the dinosaurs, digital cameras result in no film, ordering on the internet becomes so easy that fixed location retailers can't survive.

There was no stock market around when the dinos disappeared, and you may have missed the destruction of Eastman Kodak's business down to the point of bankruptcy.

But there is still a chance to make money on the last thing mentioned above.  Big box retailers are suffering, and will continue to suffer.  Someone recently made the comment that Best Buy (BBY) is a showroom for Amazon (AMZN).   I would also like to add HHGregg (HGG) to that mix.

Both BBY and HGG have been beaten down over the last year, trading just above their 52 week lows when the rest of the market is near 4 year highs.  They are a dying breed and deserved to shorted to extinction.

A couple caveats:  They are possibly takeovers, particularly Best Buy, of which there have been discussions of a management buyout.  Also, they are heavily shorted, so short squeezes are possible.

This recommendation?  Short them on any pop,  It may take a long time for them to completely disappear, but it will happen. History tells us so.

Skull Candy

Skull Candy (SKUL) is currently at the top of the short interest list.   They make headphones and other audio equipment.  A nice little manufacturer, the only problem with this company is it's valuation.

It sells at 1.32 times sales.  Not profit, mind you, but sales.  It has a nice gross margin of 50%, but in a competitive industry, that is not likely to continue, as competition will drive down prices, reducing margins.

The risk with any stock this heavily shorted is the danger of a short squeeze.  There are so many shorts that if there is any positive news, the weak shorts will cover and drive the price up suddenly.  You really need to wait for a pop in the price (the short squeeze) to short here.  The stock is way overpriced and if the company continues to grow, it will take years to grow into this evaluation.

The more likely scenario is that the stock price will drop to match the current valuation.  Enjoy the ride.

Disclosure:  I don't own this stock, and never would.  I currently have no position.

Shorting the Bounce in Oil

A number of stock experts (I should put that in quotes) think oil will resume its downtrend after this brief but substantial pop.  From the supply side Dennis Gartman believes it is a sell, and Abigail Doolittle from PeakTheories.com sees in the charts that the commodity will drop to $68 a barrel. 

Disclosure:  I own SCO, the inverse oil ETF.

Netflix - A good short?

Anyone who follows stocks knows the story of Netflix.  Distributes videos by mail and by streaming.

Stock was in the $50 range a few years ago, and suddenly caught fire, moving over $300.  Then a string of questionable decisions by management cut 75% from the stock, hitting around $62 for a recent low. 

The stock has rebounded slightly and is up to $79 as of today.  It jumped $8 yesterday on takeover rumors. 

In my opinion, the rumors are likely unfounded.  The stock still has a $4 billion market cap, and is still in a space that is can be invaded by others, particularly giants like Amazon or Apple.  It is definitely first in the market, but could be supplanted, in the way book and movie sellers have been in the malls.

It also has competition from Redbox and Blockbuster. 

I think the streaming business is worthwhile, but not necessarily at these prices.  Be very careful, as there is a big short position, and squeezes are likely from time to time.

Disclosure:  No position.

Gamestop

This retailer deals primarily in games, and is found at malls and strip shopping centers.

Why should you short this? 

• Following the Peter Lynch philosophy, I checked a few stores out around the holiday.  Two days before Christmas, one of the strip stores was empty.  Really empty. Two days after Christmas, when the mall was packed, there were a few people in this store, checking out the titles.  Very little buying going on.  When Christmas sales are reported, this store may be very light.
• There are a lot of other options for buying games.  Amazon, WalMart, Target.  Yes, it's nice to be able to choose from a lot of options, but that's available on-line. 
• The stock isn't terribly overpriced, from a valuation perspective.  But, it's not really cheap either. 
• No dividend to worry about.
• It's on the list of most shorted stocks, so there are a lot of people who think this way.  Just watch out for the regular short squeeze.

Good hunting.