How to Short the 'Cult' Stocks

Cult stocks drive the purists crazy. Netflix (NFLX - commentary - Trade Now) and Priceline (PCLN - commentary - Trade Now), both 52-week highs today, are the classic examples of the market's inability to measure classic cult stocks. The bears just keep putting 'em out on the basis of valuation and on how the competition certainly is about to destroy the stocks any minute now.

I never, ever bet against one of these kinds of stocks at my hedge fund. Way too dangerous. It's simply impossible to know when the peak will come or when the competition will finally arrive, or if they will ever arrive.

That's why my advice is, if you are going to short one of these, wait until they do stumble. When they do, you will certainly miss the first 10% or 20%. That's OK. These stocks are up on spikes but can hurt you if you time the short poorly, so it is a much better idea to wait until after you see the whites of their eyes. I know that is counterintuitive to what people want to hear. But just like it is difficult to catch a bottom in a hard-to-value stock, it is difficult to catch the top.

I would short Priceline or Netflix only after that first bad break of a quarter. Minimize the downside risk. I would also use deep-in-the-money puts and not common, as the chance for a devastating squeeze always exist in cult names that seem like they are from the occult because they just refuse to die.

At the time of publication, Cramer had no positions in stocks mentioned.

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