My Top 10 Bearish Stocks For When The ‘Fed Put’ Narrative Fails

(Pexels)

After suffering a 35% decline, the market has had a healthy 15% bounce and many investors are rushing to “buy the dip.” Popular reasons for doing so include narratives like:

  • “The Federal Reserve will do ‘Whatever it Takes’ to support markets”
  • “COVID-19 will not be temporary before a V-Shape recovery”
  • And “The market always returns to new highs.”

It has been said that the bottom is in once the vast majority of investors have lost hope. Indeed, investor sentiment is actually pretty low today but few are actually selling. As you can see below, units outstanding of the most popular ETFs (measured as AUM/price) has not declined and has actually risen considerably for QQQ:

ChartData by YCharts

Most investors have it drilled into their heads that market timing is impossible and that markets “always go up in the long run.” Thus, they wish to buy every dip available and maintain an allocation in the face of mounting losses.

While both beliefs have some truth, it can take decades for markets to recover. Japan’s equity market is still far below its 1990 levels and it took over two decades for the market to recover after 1929. Outside of the U.S., most countries’ equity markets are still below 2007 peaks. Few of us can afford to wait decades to see a recovery.

While timing the market to the day is certainly difficult (if not impossible), avoiding losses is the key to long-term survival. In my opinion, the fact that very few today believe in the idea of selling is a sign that it is time to sell.

Obviously, I have made poor calls but it is worth pointing out that I warned of a COVID-19 related risk-on market move (and food shortages) in January in “TIP: As Coronavirus Spreads, Investors Would Be Smart To Buy Inflation-Hedged Bonds.” Based on this, I was lucky enough to have begun stockpiling food in January and reduced my net equity exposure to about zero during early February (i.e., gross longs equal to gross shorts).

As of today, I am net-short by nearly 2:1 gross short to gross long and believe that the market will soon head 20-40% lower. The fact is that the main bullish arguments are backed by hope in a false premise. Let’s go over my anti-thesis to the Federal Reserve argument and, more importantly, the ten stocks I’m short selling.

(Note, this article begins with my short thesis. If you’d just like to see the short list, skip to the final section.)

The ‘Fed Put’ Does Not Exist

While a continued rise is possible, it appears that the bulk of government action is already priced into markets. The Federal Reserve is doing what it can, but it cannot print the $10T+ that would be needed to offset asset price losses.

Remember, U.S. households hold around $113T in total assets and the monetary base (hard currency and Federal Reserve QE “money”) is only $3.9T. This is to say that all assets are backed by $3.9T in narrowly defined cash. In order to finance the U.S. fiscal deficit and pursue QE, the Fed has already begun to rapidly expand the monetary base:

(Federal Reserve)

Consider the total market capitalization of public U.S. equities is $30T. Even an unprecedented $1T purchase of equities by the Federal Reserve would only boost that figure by 3%. Of course, the Federal Reserve will also need to buy Treasuries to finance the likely $3T fiscal deficit this year and finance all necessary repo/debt market operations. Quite frankly, I would be surprised if the monetary base does not rise to over $10T by year-end but with little, if any, going into equities.

It is true that the 2008-2015 monetary base expansion did not result in the much-feared hyperinflation and boosted the value of equity markets. Importantly, there were no significant supply-side/production shortages at the time as there are today. If energy/food production declines due to workers staying at home, prices will undoubtedly rise.

Even more, it is worth pointing out that much of the printed money over the past decade has flowed into foreign dollar-denominated debt which has doubled since 2008. Put simply, the Fed created dollars but an equal amount flowed out of the U.S. economy and stoked inflation in emerging markets. With most emerging-market governments now leveraged to the hilt U.S. dollar debt, net dollar demand is likely to turn negative. This will likely cause trillions to flow back into the United States on top of trillions being created.

It would be lethal for the Federal Reserve to continue to expand the monetary base in such a scenario. In other words, the Federal Reserve cannot save both the typical savings – poor U.S. taxpayer and your portfolio. Protecting the U.S. equity market from declines is likely toward the bottom of its list of concerns. Before that is financing the U.S. fiscal deficit by buying Treasuries and then keeping repo markets from crashing. Once inflation spikes, the Federal Reserve will be forced to stop most stimulus programs.

Upcoming Economic Data Likely to Disappoint

Given there is no true “Federal Reserve put,” the market is likely headed much lower. Investors are unlikely to realize that all of the potentially feasible stimulus cards have been played for some time. However, a slew of March economic data will arrive over the coming week. March manufacturing PMI data will arrive April 1st, the next jobless claims April 2nd, non-manufacturing PMI’s April 3rd, and job openings April 7th.

The market did not react to last week’s jobless claims being far worse than expected. That said, it is likely that most of the upcoming economic data will be jarring. Those who do not believe there will be a recession will likely have their minds quickly changed. Inflation data will come out April 10th and if it does not show a decline (perhaps due to price hikes at the grocery store), the Federal Reserve will likely be forced to change its extreme dovish tune on stimulus.

The Short List

Given all of the above, I believe it is an excellent time to short the market. Frankly, I believe the best opportunities are in individual stocks that have high valuations and are backed by poor narratives.

Per usual, I have combed through the Top 100 Stocks Owned by ‘Robinhood’ Investors to find short ideas. Though I am a (younger) retail investor, I generally want to bet against my demographic as it seems the majority invest based on popular narratives and not fundamentals. Thus, I am short selling the most popular stocks with high valuations and high COVID-19 related exposure.

Without further ado, here is my short list:

Name Ticker Entry Price Target Price Seeking Alpha Value Score Sell-Side Rating EPS/Price Beta
Salesforce.com, Inc. (CRM) $143.98 $80.70 F 4.55 0.11% 1.07
Amazon.com, Inc. (AMZN) $1,949.72 $82.67 F 4.66 1.18% 1.54
Apple Inc. (AAPL) $254.29 $119.19 C 4.07 4.98% 1.3
Tesla, Inc. (TSLA) $524.00 $123.89 F 2.81 -0.93% 0.49
Uber Technologies Inc. (UBER) $27.92 $9.60 4.29 -17.73%
Netflix Inc. (NFLX) $375.50 $176.60 F 3.85 1.03% 1.27
Square Inc. (SQ) $52.38 $22.63 F 3.8 1.55% 2.71
Nike, Inc. (NKE) $82.74 $42.00 F 4.2 3.26% 0.84
Advanced Micro Devices, Inc. (AMD) $45.48 $18.08 F 3.52 0.64% 2.89
Starbucks Corporation (SBUX) $65.74 $35.01 D- 3.66 4.65% 0.58

Obviously, these are all incredibly popular stocks that have found their way into many investors’ portfolios. While most of the companies listed have products I enjoy, they are all terribly overvalued and have high-risk exposure.

The common theme is that each has a low-value score, a high sell-side rating, and is among the top 100 stocks held by Robinhood investors. Importantly, studies show that most large-cap sell-side analysts tend to add no performance value and have an extreme “buy”-only bias. Thus, I am happy to bet against them.

Here is my quick short thesis for each company listed:

Ticker Name Short Thesis
CRM Salesforce.com, Inc.

Extremely high valuation. Business growth is likely to stop. CEO is far too optimistic about the situation and not adjusting accordingly.

AMZN Amazon.com, Inc.

High valuation. Poor margins. Growing labor-strikes likely to cause significant delivery issues.

AAPL Apple Inc.

Generally high valuation. Likely to be forced to delay iPhone release and see revenue collapse accordingly.

TSLA Tesla, Inc.

Nonsensical valuation. Extreme debt buildup. No sales growth. COVID-19 related production & sales woes.

UBER Uber Technologies, Inc.

Unprofitable business model. Likely to see a cliff-edge decline in sales due to COVID-19 precautions.

NFLX Netflix, Inc.

Extreme valuation and debt levels. Likely to gain in the short run from COVID-19, but struggle thereafter due to film-production pause.

SQ Square, Inc.

Extreme valuation. Likely to see significant COVID-19 related sales decline. “Sign with screen signature” practice is a liability.

NKE Nike Inc. See Article
AMD Advanced Micro Devices, Inc.

Irrational exuberance in valuation. Likely significant decline in high-end chip demand. Potential production woes.

SBUX Starbucks Corporation

High valuation. Increasing dependence on China for growth. Likely significant COVID-19 related sales drop.

The Bottom Line

Obviously, my short ideas are contrary to popular opinion; that is the core of my overall short thesis on these stocks. These are generally companies that have garnered high attention by short sellers in the past, often to the eventual embarrassment of bears. Indeed, it seems that the market has trained investors to never bet against most of these companies.

That said, the market regime of 2015-2019 is now dead and the rules are changing. As companies and individuals struggle with cash flow, irrational popularity-based investing can no longer reign. The piper must be paid and, looking at the valuations and fundamentals of the most popular stocks held by investors, there is a lot of money due.

Now, this is not to say everything is “doom and gloom.” In fact, I would argue that within all stocks listed on the NYSE, there are more long-term fire-sale long opportunities than there are short opportunities. Particularly among smaller capitalization, low leverage, capital-intensive companies that produce economic necessities. Ideally, these are companies trading at or below their book value.

However, most large-capitalization companies in the S&P 500 such as those mentioned do not create necessities. Most are not capital-intensive, meaning investors own nothing besides future cash flow. If the value of future cash flow is negative (quite possible given their unsecured debt levels), they own nothing (besides perhaps a popular brand). Obviously, a few stocks listed are capital-intensive (i.e., Tesla) but are still valued magnitudes away from book value.

Obviously, the Federal Reserve stimulus binge may temporarily bring these stocks higher. However, I doubt they will make all-time-highs as the Federal Reserve cannot print enough money without stoking hyperinflation.

Interested In More Model Portfolios?

My fellow contributor BOOX Research and I run the Core-Satellite Dossier here on Seeking Alpha. The marketplace service provides an array of in-depth portfolios designed using the academically-backed Core-Satellite approach. This involves creating a base long-term portfolio (the core) and generating alpha using unique well-researched tactical trades (the satellite).

As an added benefit, we’re allowing each new member one exclusive pick where they can have us provide in-depth research on any company or ETF they’d like. You can learn about what we can do for you here.

Disclosure: I am/we are short AMD,NKE,UBER,AAPL,SQ,CRM,TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Intend to short AMZN, NFLX, SBUX over next 72 hours depending on price-action.

Be the first to comment

Leave a Reply

Your email address will not be published.


*