Here’s a question about shorting that came in a few days ago:
Phil,
I was looking at Nutrisystems (NTRI) last week which appeared to be a very good Rule #1 stock. It met all the requirements.
On Tuesday, 9/5, the price shot up over both the 10 and 30 MAs and the Stoch and MACD were both showing “buy” signals. I was about to buy in at about $53 per share, still well below the $60 MOS.
But then I came upon a posting showing that NTRI was one of the most heavily shorted stocks with almost 40% of the float shorted. This was an indication that a lot of people, with a lot more knowledge and experience than I have, believed that the stock was about to go down big-time. So I didn’t buy.
Yesterday the stock closed at $59.35 which represents almost a 12% gain in 10 days which I missed because of my fear of the “short” situation.
How would you have handled this?
Thanks
Hal Whitney
My response:
Hal,
A lot of short sellers is not a good thing. You are right about that.
Still, that doesn’t do anything to disqualify a buy if you know why the
shorts are selling and disagree with them.In other words, you must
have the first M: Meaning. You must understand this business. If you
don’t know why the shorts are shorting, then do you understand the
business well enough to own it as if it were the only business you can
own to feed your family?That said, Hal, I’m going to take you to the woodshed about calling
NTRI a Rule #1 business.For a business to be a Rule #1 business, it
has to be wonderful. To be wonderful it has to be a durable business
with a big moat. If the Big Five numbers are inconsistent in the past,
we can not possibly conclude that the business is consistent enough to
be certain it has a good moat in place with which to defend its turf.NTRI ROIC, Sales, EPS and Free Cash Flow numbers are a mixed bag of
inconsistency. Only its equity growth is consistent. While it might
be a great company now for all I know, these numbers show me that
whatever the future, the past was a mess. Not having a crystal ball,
I’m not going to stake my future on this one.Remember you guys, Rule #1 requires that you do all 4Ms. You start taking short cuts and you are going to get burned.
Now go play.
Related Posts:
- Shorting Stocks
- Refresher Course: How to Begin Identifying 4M Businesses
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.