Short List and Fundamental Factors

You will need to know before you short a stock if it is on your brokerage's

short list. This is a list of stocks that the broker can allow

you to short. Quite often, you cannot short a stock because the broker

does not have it in inventory or can't get it for you. This can be

a real problem. Do your homework before you waste a lot of time in

analysis.

When you are planning to short a stock and hold it longer than

one day, you need to know about the fundamental factors influencing

that stock. Remember, you are looking for factors that lead to a

decline of growth, which will lead to a decline in the stock price—

just the opposite of what you would normally be looking for. Here is

a list of the most important fundamental factors:

1. Annual earnings growth. Look for a company with a decline

in the annual earnings growth rate. Consider a company

that was growing at 20 to 50 percent and is now losing

money and posting lower annual growth projections.

2. Quarterly growth. Following a news announcement calling

for lower earning and lowering of analysts expectations,

look for a decline in quarterly earnings growth.

3. Management or company culture revision. Look for a major

change in management—if possible, a change in company culture

that would be a radical departure from the current one.

4. Institutional selling combined with insider selling. Are funds

selling the stock? If so, has the sector just moved out of favor?

This would be very good for the short seller because traders

holding the stock long would sell the stock to avoid a massive

sell-off. Look for selling of stock by major executives, which

may be a forewarning that they are in fear of losing their jobs

and want to raise cash. This would have even more impact if

it comes at the same time institutions are selling the stock.

5. Debt and cash flow. Is the company taking on debt or

financing with the use of bonds? Is there a problem with

the company that is expected to affect cash flow?

6. New technology and competition. A combination of technology

and competition may place the company's future in

question. This is usually brought to your attention by a

news story or an analyst's report. Pay close attention to

companies that only have one or two products and are

vulnerable to other technology and competition.

7. Sector change. Look for companies that are in the top of their

sector because, as the sector rotates, they usually will end

up at the bottom. Sector analysis is one of the most important

parts of your work. Knowing which three sectors are on

top and at the bottom is key to your success in general.

8. Take over or merger. In some cases, a takeover of a company

will cause the stock to drop because the takeover is

perceived as not being in the best interests of the company

or its stockholders. Likewise, a merger can have a negative

effect on a company. Be careful with this one. Don't anticipate

a negative impact until you are sure.

You will need to know before you short a stock if it is on your brokerage's

short list. This is a list of stocks that the broker can allow

you to short. Quite often, you cannot short a stock because the broker

does not have it in inventory or can't get it for you. This can be

a real problem. Do your homework before you waste a lot of time in

analysis.

When you are planning to short a stock and hold it longer than

one day, you need to know about the fundamental factors influencing

that stock. Remember, you are looking for factors that lead to a

decline of growth, which will lead to a decline in the stock price—

just the opposite of what you would normally be looking for. Here is

a list of the most important fundamental factors:

1. Annual earnings growth. Look for a company with a decline

in the annual earnings growth rate. Consider a company

that was growing at 20 to 50 percent and is now losing

money and posting lower annual growth projections.

2. Quarterly growth. Following a news announcement calling

for lower earning and lowering of analysts expectations,

look for a decline in quarterly earnings growth.

3. Management or company culture revision. Look for a major

change in management—if possible, a change in company culture

that would be a radical departure from the current one.

4. Institutional selling combined with insider selling. Are funds

selling the stock? If so, has the sector just moved out of favor?

This would be very good for the short seller because traders

holding the stock long would sell the stock to avoid a massive

sell-off. Look for selling of stock by major executives, which

may be a forewarning that they are in fear of losing their jobs

and want to raise cash. This would have even more impact if

it comes at the same time institutions are selling the stock.

5. Debt and cash flow. Is the company taking on debt or

financing with the use of bonds? Is there a problem with

the company that is expected to affect cash flow?

6. New technology and competition. A combination of technology

and competition may place the company's future in

question. This is usually brought to your attention by a

news story or an analyst's report. Pay close attention to

companies that only have one or two products and are

vulnerable to other technology and competition.

7. Sector change. Look for companies that are in the top of their

sector because, as the sector rotates, they usually will end

up at the bottom. Sector analysis is one of the most important

parts of your work. Knowing which three sectors are on

top and at the bottom is key to your success in general.

8. Take over or merger. In some cases, a takeover of a company

will cause the stock to drop because the takeover is

perceived as not being in the best interests of the company

or its stockholders. Likewise, a merger can have a negative

effect on a company. Be careful with this one. Don't anticipate

a negative impact until you are sure.