Despite the General Downturn in the Stock Market, There Are Still Some Stocks Trading at Much Higher Valuations Than Can Be Reasonably Justified
These overvalued companies often become the target of short sellers, investors looking to profit by betting against the market or shorting individual stocks. Today we examine five of the best stocks to short right now.
They’re called shorts because they typically use short selling as their preferred investment strategy. Short selling is where an investor borrows shares of the stock, sells them at the current price and then waits for the price to decline.
Once the price declines to its target levels, the short will rebuy the shorted shares at the depressed price and then return them to the original owner at the original price. The short profits on the difference between the price they borrowed/sold the shares at and the price they buy/return the shares at.
Short selling is considered a higher-risk investment strategy due to the potential for uncapped losses; if a shorted stock increases in value, the short seller will owe the difference between what they shorted at and what they rebought at. Since there’s no limit to how high a stock can go, losses on short selling are theoretically uncapped. Because of the increased risk, most brokerages recommend that only professionals engage in short selling.
However, if an individual identifies a stock they’re very confident will go down, short selling can be pretty lucrative.
Below are five stocks that would-be short sellers should consider.
1. AMC Entertainment (NYSE: AMC)
Perhaps no other company has embraced the meme stock phenomenon like AMC Entertainment (NYSE: AMC). After nearly going out of business during the pandemic, the theatre chain gained a lifeline in the form of the self-described “apes” in the r/wallstreetbets subreddit.
The company began using their elevated share price to invest in other meme stocks, such as micro-cap mining company Hycroft Mining Corporation (NASDAQ: HYMC). They leaned into meme stock mania when they released a new class of shares to raise additional funds; the ticker for these new shares is APE.
AMC finds itself on this list because of the industry it is in. While much of the blame for the fall of movie theatres have been laid at the feet of the COVID-19 pandemic, these companies were in grave trouble before the coronavirus appeared. High prices, advanced televisions, and the rise of streaming made going to the movies seem less and less like a fun night out and more like an unnecessary expense. Moving forward, people only seem interested in seeing the biggest films in theatres; smaller movies and those lacking the sense of grandeur that audiences have come to expect are better suited for home viewing.
Meme stock mania will die down eventually, and nothing AMC is doing will bring the masses back to the theatres, but the stock still trades at an elevated level. That makes AMC one of the better short candidates on the market now.
Shares of AMC Entertainment last traded at $6.88 per share, down -1.43% on the day. YTD, AMC stock is down -74.06%.
Learn more about AMC Entertainment: Website | Investor Deck | AMC Chart
Gamestop (NYSE: GME), the OG meme stock, is something of an anachronism in today’s world. A remnant of the time when video games were distributed via physical copies, GameStop Corp. has struggled to adapt to the age of digital downloads and cloud gaming; their bread and butter business of buying/selling used video games is virtually non-existent now.
Today, with very few people buying physical copies of video games, the company can be more accurately described as a toy store or antique store than a video game retailer. Novelty items like action figures and older video games drive more traffic than new video game releases.
Knowing their company was in the process of going out of business, GameStop management decided to hop on the NFT bandwagon by developing an in-house exchange for trading video game-themed NFTs.
Shortly after announcing their NFT project, the bottom fell out of the NFT market. NFT sales are down more than 90% from their peak, and NFTs are selling for pennies on the dollar compared to last year. It should only be a matter of time before GameStop shutters their exchange, which will undoubtedly drive the share price down. Place your short bets before that happens.
Shares of GameStop closed the day at $25.38 per share, up +1.4% on the day. YTD, GME stock is down -33.58%.
Learn more about GameStop: Website | Investor Deck | GME Chart
Source: The Plain Bagel YouTube
Also Read: Top 3 Stocks to Short Based on Negative Technical Outlook
3. Bed Bath & Beyond (NASDAQ: BBBY)
No company on this list faces the same existential crisis as Bed Bath & Beyond (NASDAQ: BBBY). While it used to be an attractive option for its wide variety of household goods, the company failed to adapt to the rise of e-commerce. The failing retailer has been laying off employees and closing stores in hopes of returning to profitability but has had precious little success thus far.
Customers can now hop on Amazon (NASDAQ: AMZN) or other e-commerce sites to purchase their home goods, often at a lower price point and with an even wider selection. This is reducing traffic in their stores and driving down revenues.
After recently reporting a 28% drop in revenues and wider than expected losses, many observers believe it’s only a matter before the company declares bankruptcy. This would be a best-case scenario for shorts, so get your bets in before the announcement.
Shares of Bed Bath & Beyond closed Monday at $5.99 per share, down -1.64% on the day. YTD, BBBY stock is down -60.49%.
Learn more about Bed Bath & Beyond: Website | Investor Deck | BBBY Chart
4. Digital World Acquisition Corp. (NASDAQ: DWAC)
One of the few special purpose acquisition companies (SPAC) still limping along without making a qualifying acquisition, Digital World Acquisition Corp. (NASDAQ: DWAC) gained headlines when it was announced that it would be merging with Trump Media and Technology Group, which owns Truth Social, the Twitter clone for conservatives who are fed up with Twitter’s censorship policies.
The deal began to encounter obstacles to closing almost immediately after the announcement. In addition to Trump not joining Truth Social for months after it was started, other would-be users complained of long wait times to approve their new accounts.
Today, the platform is almost an abject failure by just about any metric. It’s currently the 25th ranked social media app on the Apple App Store, and the 133rd ranked “News and Media Publishers” website by SimilarWeb. Unable to secure advertising spend, the platform has thus far not been monetized, meaning it’s burning a rapidly decreasing cash balance.
Outside of the platform’s operation, the merger itself is fraught with complications. Regulators have been investigating everything from the identity of investors in the SPAC to coordination between DWAC and the Trump Media and Technology Group.
Investors of DWAC most likely put a nail in the coffin of the merger when they voted not to go through with the acquisition at a shareholder meeting in early September. While DWAC management successfully lobbied for an extension to the merger deadline and another shareholder vote, a second vote has less chance of passing than the first.
At this time, the merger is all but dead in the water. DWAC will likely be liquidated when it inevitably falls through and funds returned to investors. Meanwhile, Truth Social will lose the funding it depended on, leading to the likely death of the platform and its parent company.
Shares of Digital World Acquisition Corp closed Monday’s trading session at $18.05 per share, up +7.38% on the day. YTD, DWAC stock is down -65.09%.
Learn more about Digital World Acquisition Corp: Website | Investor Deck | DWAC Chart
5. Atlis Motor Vehicles (NASDAQ: AMV)
Unlike the other companies on this list, Atlis Motor Vehicles (NASDAQ: AMV) appears to be an excellent short candidate based on its trading history, not on any perceived weaknesses in the business itself; the EV startup only started trading on September 27 and gained over 700% in just a few days.
While the company operates in an attractive and growing industry, such a steep rise in share price typically ends with a drastic rebound. Investors will need to be careful with timing on this one, as the inevitable fall will likely be followed by a more measured run back up. Get your shorts in before the fall ends, and exit the trade before it ticks back up.
Shares of Atlis Motor Vehicles are currently changing hands at $18.47 per share, down -9.46% on the day. YTD, AMV stock is down -92.43.
Learn more about Atlis Motor Vehicles: Website | Investor Deck | AMV Chart
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Disclaimer: Wealthy VC does not hold a long or short position in any of the stocks mentioned in this article.