Shorting a stock is a time honored technique where traders who believe a stock is going down simply borrow shares from someone else and sell them repeatedly assuming they can buy back the shares later at a lower price. The practice tends to produce the desired results because this repeated selling pushes the stock price down and scares longer term investors out and their selling pushes the stock down further.
Smart traders and investors take patience and time to look for these beaten down stocks, do their due diligence and sometimes decide what has occurred is nothing more than bargain time in pricing of some stocks. Note that this short selling many times is actually saying there IS trouble in the company and indeed the stock price will come down. So research is very important here, but when that research is convincing the opportunity is very ripe for investment gains.
Now most people like to buy a stock on the way up like what is occurring in Apple shares right now. Apple is the stock that in many investors eyes will make them lots of cash like betting in a casino. Maybe it will, maybe it will not. What we do know is in my decades of experience that chasing stocks up is fools good and only the best market timers survive. We like to find values and value pricing and take our bets in stocks where downside is limited and upside is most positive.
Two stocks in our current portfolio are currently being taken to the woodshed and beaten down good.
One Frontier Communications, symbol FTR, is one of our favorite option plays. Earlier this year it took a pounding from short sellers who just knew the company would lower it's dividend and the price would fall further. We will leave it to you to find our posting on this security a month or so ago when we took a well researched and somewhat risky option play on FTR which in the end paid off most handsomely. Today the opportunity is again upon us with short sellers pushing FTR to around $4. The dividend is solid, the company sound and finances improving and the shorts are plainly wrong here. Therefore the opportunity to take a long term position is very good here at just above $4 per share. You get an almost 10% very safe dividend and some possible upside when the short sellers give up. The opportunity to take an option position is just as good. If the short selling continues today we plan on taking a November 4 put option on this stock at 50 cents a share or better.
The other stock is Enerplus, symbol ERF, which is a Canadian oil company. We have loved this stock for years and even with some losses we took last year it has made us lots of money over the years. The shorts have piled into this company because they believe that the stock is paying a unsustainable dividend. This indeed may be so, but the CEO of the company in repeated interviews has made clear he will stand by his payout which now is almost 10%. ERF is a situation where as we noted above offers the opportunity to take a position in a company rich in value, but has risk due to being in the oil sector. Two scenarios. If the company lowers the dividend the stock likely will stabilize and move up since there will less financial pressure on the finances of the company. Even then the dividend will not be lowered hugely and you will have a stock with good capital gains potential and a nice payout. If the dividend is not lowered you continue to get a very juicy dividend and a stock at a bargain basement price. We might be proved wrong here, but there is little to lose and lots to gain if we are right. We currently have a large put option position on this stock and will not be increasing that position at this time. Note that ERF is a monthly dividend and there is a Canadian tax of 15% before you get the dividend. The Canadian tax can be taken against your US tax as a credit.
No comments:
Post a Comment