Finding stocks to sell short is easier than finding stocks to buy long. When you are buying long, you are looking for companies that are not doing too well now and hoping that they will be worth more in the future. You should approach selling companies short as a nice little detective homework or test of your reading and comprehension skills.
The truth is that public companies already have word out there regarding possible hints as to their future financial health. You just have to make it your job to keep your eyes and ears peeled regarding these hints.
First, look for income warnings. Next, look for marketing warnings. Third, look for competition. These are all in the books and reports already, you just have to be trained to focus on them. The market will reward your sleuthing abilities by paying you tons of cash if you short a company and it crashes. Here are some warning signs to look for when determining which company to sell short.
Bad news don’t happen in a vacuum. A bankruptcy doesn’t happen overnight. There is always some earlier indication that things aren’t going right. One key warning sign are earnings warnings or downgrades. The more you see of this, the higher the chance the company will once again miss for the next quarter and the stock will get punished.
Make sure you study the earnings warning though. Make sure that the lowered earnings are due to operations and market conditions not some one time hiccup or something that can be fixed within the coming quarter. If you don’t pay attention to the reason for the lower earnings, you might get surprised if the stock actually beats expectations, and you end up losing money trying to short the stock.
Eroded market share
A key indicator of serious trouble up ahead for a company is if the firm’s market share is shrinking. This means the company just can seem to keep it together and there is something seriously wrong with its strategy. This can be a great indicator that you should start shorting. However, before you start selling, you should look at the company’s competition. Are they undergoing the same problem? If they are, then, don’t short since it might be an industry-wide issue. If they aren’t and are in fact growing, then you should short.
Changed technology or regulatory scheme
Be on the lookout for changes in technology standards or formats. They might herald major upheavals in market share and profitability. If there is a new standard arising in a market and the company you are tracking isn’t adapting, this is a serious red flag and you might want to short it.