Short Ideas for the Growth Hoax

At times like these, when the Fed seeks to stimulate economic expansion, the stocks that should benefit most are "low-quality" names. However, I believe the current market environment is illusory, providing a sort of growth hoax that I expect will be exposed after the Fed's Halloween meeting.

I believe the Fed might let the market down with rate inaction, so I'm looking for short ideas where stocks that have run higher on expansionary rate expectations could give back gains after Halloween.

Getting a Fed Boost

Expansionary measures are meant to help firms find capital to finance growth at times when a little extra incentive is useful. In that type of environment, the firms that benefit most are the ones financing growth in ways other than through the use of operating cash flow.

These are riskier firms, the kind without earnings but with high hopes and a lot of debt. At the risk of getting too technical, they benefit also because most of their value is found in the terminal portion of the discounted cash flow model, the part outside of the forecast period and most sensitive to changes in cost of capital.

Just after the start of the Fed's most recent expansionary spurring -- you remember, the one after the tech bubble burst in 2000-02 -- there was an initial premature market rebound before the realization of a tough environment sent stocks lower. In 2003, however, when it was clear that Fed support would help the economy find traction, it was the "low-quality" shares that outperformed.

That period taught me a lesson. I learned that lesson as I watched a "sell" recommendation outpace many of my better-run "buy" names. The sell idea that burned the painful, though useful, memory into my young, analytical skull was FuelCell Energy (FCEL - commentary - Cramer's Take), which soared 99% that year. The company was still far from showing signs of operational success, but the stock soared as "low-quality" names outperformed. It was a clear case where not-so-hot operations (read: bad companies) enjoyed scorching-hot stocks (read: good stocks).

That Was Then ...

Many believe the Fed has again begun expansionary efforts, which may be behind the recent outperformance of "riskier" industries. For instance, the S&P biotechnology group was up 9.8% in the 13 weeks through Oct. 12. Over that same 13-week period, information technology (+4.2%) was second in sector performance only to energy (+4.3%), but $80+ oil has a lot to do with that sector's leadership.

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At the time of publication, Kaminis wahad no positions in the stocks mentioned, although positions may change at any time.

Markos N. Kaminis, the Wall Street Greek, is currently building his own financial advisory business. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kaminis appreciates your feedback; click here to send him an email.