Analysis: Repeatedly burned, short sellers avoid momentum stocks

Mon Oct 21, 2013 3:15pm EDT
 
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By Ryan Vlastelica

NEW YORK (Reuters) - Even as some of Wall Street's biggest trading favorites - considered by many to be massively overvalued - report earnings this week, short sellers are staying away.

Shorts have become gun-shy as the market has continued to rally, making bets against high-flying stocks like Netflix or Tesla very expensive ones. Steep losses have been amplified by "short squeezes," where shorts are forced to cover their bets to prevent further losses.

The current caution underscores how difficult it has been to score with negative bets in an environment fueled by Federal Reserve stimulus. Even companies that have seen meteoric rises, giving them stretched valuations, have been essentially immune to the downside.

That's resulted in a lousy year for hedge funds with a short bias strategy - those that take a net short position in the market. Through September those funds were down more than 13 percent for the year, according to Hedge Fund Research.

"The people who have tried to short have been annihilated up to this point. I'm sure some is still going on, but they're being very cautious. Even gambling that there will be corrections after earnings has become risky," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore.

VALUING NETFLIX

One of the market's biggest momentum names is Netflix Inc (NFLX.O: Quote), up 260 percent this year. By many metrics it is overpriced, with a price-to-earnings ratio of 105.48 that far eclipses the 16.25 ratio of its peers.

It is the third-most-overvalued stock in the S&P, according to StarMine's intrinsic value, a calculation of where a stock should trade based on its most likely growth trajectory over the next decade or more. StarMine puts Netflix's value at $50.04 a share; it currently trades at $333 a share.   Continued...

 
A Netflix return CD mail envelope is shown in Encinitas, California, April 19, 2013. REUTERS/Mike Blake