Profit From These 9 Stocks as They Crash

Most of the time, I recommend stocks to buy and hold. I sell when stocks reach
what appears to be their full gains potential or, less often, when the company
fails to live up to my expectations. Occasionally, I'll also give out lists of
stocks to avoid because of their subpar outlook. At this point in the market
cycle, though, I see another opportunity shaping up for aggressive investors
only. If you've got the nerves and the financial resources to play the game, I
believe there's good money to be made selling individual stocks short. Short
sellers borrow stock (from a broker) and sell the shares, hoping to buy them
back later at a lower price. The difference, minus commissions and any dividends
payable to the owner of the stock, represents the short seller's profit. In a
strongly uptrending market, it's tough to find many stocks that seem due for a
fall. However, the market climate has changed during the past few months.
"Accidents" are proliferating and some short sellers, at least, are
cleaning up. A fresh-perked example: In October, hedge-fund manager David
Einhorn disclosed at an investment conference that he was shorting Green
Mountain Coffee Roasters (NASDAQ: GMCR ). Not only did Einhorn denounce the
stock as overvalued, but he went further and accused management of accounting
shenanigans. Naturally, the company's legion of supporters poured cold water
on his arguments. But then uh-oh! On Nov. 10, GMCR came out with disappointing
quarterly earnings and the stock cratered , off 39% in day. Score one for
Einhorn. Screening for Losers Where do we find the market's next set of
disasters waiting to happen? I ran a screen recently that focused on three
criteria to help identify vulnerable stocks. (You want to short the sickly
wildebeests in the herd, not the alpha males.) I looked for names that: Already
have skidded at least 20% from their 52-week highs a sign that some investors
might know the company has problems. Are operating at a much lower level of
profitability (return on equity) than the market average. Are trading at more
than 20 times projected earnings for the year ahead (overvalued stock).
Interestingly enough, certain industry groups popped up repeatedly in my screen:
homebuilders and related suppliers, outdoor advertising firms, a sprinkling of
faddish Internet-based businesses, and a bumper crop of Chinese outfits a hint
that the next really big market blow-up might be brewing in Shanghai, rather
than Athens or Rome. Stocks to Short Aluminum Corp. of China (NYSE: ACH )
Brookdale Senior Living (NYSE: BKD ) Clear Channel Outdoor (NYSE: CCO ) Gaylord
Entertainment (NYSE: GET ) Shutterfly (NASDAQ: SFLY ) Lennar (NYSE: LEN ) Pulte
Homes (NYSE: PHM ) Renren (NASDAQ: RENN ) Youku (NASDAQ: YOKU ) What to Do Now
When shorting these stocks, always remember to set a stop-loss at a reasonable
level above your entry (I recommend 15%). Place your stop order soon after your
short is executed, and make the order good till canceled . That way, you'll be
taken out of the position automatically if some unexpected development pushes
the stock up to your stop-loss. Never short stocks without a stop; you'll
expose yourself to theoretically unlimited losses.