JADE – LJ International (NASDAQ) – (Closing Price – $2.79)
I recommended LJ International as a speculative pick based on the company finally reporting earnings. However, the company didn’t get a pre-earnings run like I thought and the company reported disappointing results. Therefore, I am going to recommend to sell LJ International.
Disclaimer: I sold my position in LJ International.
If you know of any stocks that are undervalued or overvalued feel free to leave a comment mentioning the company and why you think the share price will go up or down.
I would be particularly interested in any company that is quickly growing earnings and has a low valuation (based on PE ratio or book value). I would also be interested in companies that are not profitable yet, but are quickly cutting their losses and headed for profitability in a few quarters.
Speculative picks will also be welcome.
In my last post I wrote that the most important thing to consider before you decide to short stocks is evaluate how the overall market is behaving. Once you determine the market is conducive to shorting stocks how do you determine what stocks to short?
In general you should look for stocks that are trading at high valuations but that don’t have the financial numbers to justify the lofty valuations. A good example of this is the run Jones Soda (JSDA) had in 2006 and 2007. The stock price of Jones Soda went from around ten dollars to over thirty dollars in about five months but the financial numbers of Jones Soda did not show any significant improvement. It was inevitable that that stock price was going to crash. To make matters worse for Jones Soda the company’s financial numbers started to deteriorate and the company is now trading at under three dollars.
My example of Jones Soda provides another thing to look for: rapidly deteriorating financials. Stocks that have rapidly declining earnings and revenues are good places to look for short opportunities regardless of valuation. At the beginning of 2007 most banks, bond insurers, home builders, etc. were trading at reasonable valuations. However, if you foresaw the havoc that the housing bubble collapse was going to cause you could have made a ton of money shorting these companies. (more…)
A couple of months ago I wrote a couple of posts about what shorting is and how to place a short order. Now I will give you some general tips on how to make profitable short investments/trades.
In my opinion the most important thing to consider before you decide to short stocks is to evaluate how the overall market is behaving. In a very bullish market it would probably be wise to avoid shorting all together. The reason for this is that stocks prices can continue to go up in spite of very high valuations. For example you might have been justified shorting most stocks half way through the bull market of the 1990s. However, you would have lost a lot of money if you did because investors continued to bid up stocks regardless of valuations. In an irrational bull market like the late 90s the safest thing to do is avoid shorting until the market has clearly turned.
On the same token the best time to short stocks is when the market is clearly bearish. In fact shorting stocks may be the only way to make money in a severe bear market (short term at least). Also, speculative stocks that do manage to jump up in price in a bear market tend to correct quicker.
A market that is neither bearish nor bullish, such as the current one, also provides ample opportunities to short stocks.
I will describe what stocks provide good short opportunities in my next post.
JADE – LJ International (NASDAQ) – (Closing Price of Friday: 6/15/08 – $3.50)
LJ International is a company I have followed for a few years and I have written about the company a couple of times on my website. I recommended the company as a short recommendation for a 17% gain last year and I also recommended staying away from the company a few months after I gave my cover recommendation.
In retrospect, my last post to avoid the company because of credibility issues was actually a bad call because I knew speculators were going to bid up the stock price in anticipation of the company releasing earnings. After I wrote my last post on LJ International the stock price more than doubled in just a few weeks. However, the company never reported earnings and the stock price has been meandering ever since. (more…)
The Market is Brutal
The current market is brutal and I think some of the selling is getting overdone. Almost all stocks, except speculative oil stocks, have been sold off indiscriminately. I think the indiscriminant selling provides opportunity for those who are willing to think like contrarians and exercise patience.
I think the sell-off in small caps and tech stocks has been undeserved. Some of my stock recommendations have taken a hit but I think it would by unwise to follow the herd and sell anything regardless of valuation, especially stocks that have improving fundamentals.
I think the market will probably continue to go down some more but I think it would be wise to start to accumulate small caps and tech stocks. I would avoid/short financials and airlines.
On another note oil continues to rise and nothing is being done to counter the excessive speculation taking place. The Fed, which is causing more problems than it is solving, needs to learn moderation and start being proactive instead of being reactive. In the aftermath of the housing bubble, which the Fed helped create, the Fed decided to drastically cut rates without regard to rising commodity prices. This has helped create the current commodity bubble. Now the Fed is just sitting there without a clue. (more…)
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