They say we are in the midst of a stock pickers’ market.
Finding the nuggets on the long side is becoming more and more difficult.
Rewards will go to those who can identify the winners in advance.
To the losers comes mediocrity in the form of single-digit returns — or worse. Own the wrong stocks and you might be losing money in 2014.
That’s why some suggest throwing in the towel by recommending index funds.
Hogwash, I say!
Instead, dare to be a stock picker and big gains will follow.
One strategy in a stock pickers’ market is to be both long and short stocks.
Not only should you strive to find the winners, but pad your portfolio with the profits from a short sale of a stock that is falling and falling hard.
In selecting which stocks to short, I would suggest following noted short seller Jim Chanos.
He has some simple, short recommendations that anyone can profit from.
Look no further than International Business Machines (NYSE: IBM). Big blue shares fell on Wednesday after it released another in a long series of disappointing earnings reports on Tuesday after the market closed.
While IBM beat on the bottom line — mostly attributed to financial engineering, including stock buybacks — the company fell short of revenue expectations in the fourth quarter.
Analysts had already been downbeat on revenues to begin with. Thus, IBM’s shortfall on revenue expectations solidified the Jim Chanos theory that IBM is heading south.
Putting the nail in the IBM’s coffin was guidance for 2015 that was below expectations.
Given that analysts expect IBM profits to only move slightly higher next year, it is easy to see why Chanos thinks IBM is overvalued.
He thinks the same of another Dow component, Caterpillar (NYSE: CAT).
The giant truck maker has a big problem in 2015 and beyond. Global deflationary pressures and slower growth in China put Caterpillar in a tough spot to grow profits.
The coup de grace for Caterpillar is in the energy sector. The collapse in crude prices will slam capital spending, putting a freeze on future projects.
Caterpillar needs expansion, not a capital spending freeze.
Add in the difficulties in the mining space and it is hard to see how Caterpillar stock can maintain its current lofty valuation.
Where some are bottom-feeding after the most recent decline in crude prices, Chanos is thinking the opposite, especially with respect to the large integrated oil companies.
Both Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) have held up relatively well, considering the decimation elsewhere in the oil patch.
The long thesis for these giants is that stronger balance sheets position the company well to ride out the storm. Then, when oil prices reverse course, these companies will be the first to benefit from higher prices.
Their large balance sheets will allow for capital spending when others are contracting.
Not a bad thesis, but what happens if oil prices drop another $20 per barrel?
Crude production across the globe has yet to slow, even with the large drop in prices thus far.
Who will blink first?
I’m not sure anyone will and that is the problem for buying crude stocks today.
Chanos thinks both Exxon and Chevron are overvalued at the moment.
Dare to outperform the market with stock picking that includes select shorts like the stocks Chanos is selling today.