Shorting stocks can get retail investors into a boatload of trouble, especially given the potential pain that could be dealt out in the event of a short squeeze, or worse, a meme rally that draws the attention of the folks over on Reddit. After the great Gamestop (NYSE:GME | GME Price Prediction) meme rally, no short-seller is safe, and that makes bearish put options a more compelling option to bet against certain names that one thinks are overdue for a big plunge.
Though I would never short a stock based on a list of short ideas, whether it’s from an established firm such as JP Morgan (NYSE:JPM) or an individual investor like the great Dr. Michael Burry of The Big Short fame, I do think that it makes sense to perhaps consider the bear case a bit more if you’re a shareholder in a company that’s made such a short list. Perhaps hitting the sell button or doing some profit-taking could make a lot of sense if your favorite investor (like Burry) made a bearish bet against one of your portfolio’s larger holdings.
In any case, this piece will look at a few of JP Morgan’s fairly long list of short ideas, some of which may come as a surprise (or not). Though I wouldn’t bet against the names, I do think the bank’s bear points are convincing. But are they convincing enough to justify taking a bit of profit off the table?
Fortinet
Fortinet (NASDAQ:FTNT) is a cybersecurity firm that JP Morgan recently downgraded, citing competitive pressures and “risks to growth” beyond the fourth quarter. Undoubtedly, shares of Fortinet have been under serious pressure over the past year, now down close to 27% from its all-time highs.
With a fairly high 34.2 times trailing price-to-earnings (P/E) multiple and the potential for AI-augmented rivals to take share, I certainly understand the bear case for the stock. While the name did make JP Morgan’s short ideas list, it is worth noting that the implied downside might not all be too severe, given the $75.00 per-share price target, suggesting another 10% drop from current levels.
Not every firm is bearish, though, with Fortinet catching a bid higher following TD Cowen’s upgrade, which cited Fortinet as “more insulated than most” against AI threats and went so far as to cite other headwinds, including inflation in memory chips, as “overblown.” Indeed, Fortinet is a name that’s in an intense tug-of-war between the bulls and the bears.
Personally, I’d much rather skew towards selling or holding going into next week’s quarterly earnings. There’s too much at stake, and it’s tough to determine how much of an impact AI will have on the business. If Fortinet moves fast, its shares might prove fairly priced right here. But, for now, I don’t see much of a reason to rush in on the latest dip.
Imperial Oil
Imperial Oil (NYSE:IMO) stock has been on a hot run, gaining 45% in the past year and close to 78% in the last two years. Undoubtedly, the Canadian energy firm might need some time to digest those heated gains moving forward, especially if the firm has been “over-earning” and is nearing the top of a cycle, as JP Morgan analysts might believe.
Undoubtedly, cycle timing is a hard thing to do, but with a premium valuation versus the Canadian peer group (17.9 times trailing price-to-earnings) and the potential for a margin mean reversion, I do think that it’s less risky to get out early than to stick around with the expectation that recent years’ momentum will continue on.
Even if JP Morgan is a tad early to go against the firm, I must say the stretched valuation doesn’t leave all too much room for a negative surprise.
Given the cyclical swings in both directions, perhaps profit-taking isn’t the worst idea in the world, especially if you’ve ridden the multi-year run all the way up. Finally, the 2.1% dividend yield certainly isn’t the highest of the big energy plays. Perhaps rotating into a cheaper, yield-heavier name could make a lot of sense if you’re keen on sticking within the energy sector.
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