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Working on Our Short Game

Jonathan Moreland

After maintaining for months that the market is overvalued, I finally added some positions to InsiderInsights' Recommended List to take advantage of this heartfelt belief.

Basically, I added a short of the S&P 500 index using SPDRs(SPY) and buying a position in the ProFunds (USPIX)UltraShort OTC (USPIX:Nasdaq) fund.

SPDRs is an acronym for Standard & Poor's depositary receipts and is a unit investment trust established to accumulate and hold a portfolio of the equity securities that comprise the S&P 500. It trades like a stock and has continuously changing prices during the day.

But one big difference is that it can be shorted on a down tick, which is good for our purposes. Because it's a fund, it does have expenses, but they are a minimal 0.12%. Another detractor from eventual total returns, though, is the 1.22% indicated yield on SPY. Shorting this exchange-traded fund, or ETF, means paying that dividend when it is due.

This short position is not expected to rank among our biggest winners or losers, but given our very bearish view of the market, we expect this position to earn more for us than simply putting the proceeds into cash. It also has the added benefit of hedging our overall portfolio. Determining when to close this short position will fall primarily on the level and direction of our Insider Market Indicators. As long as they remain in solidly bearish territory, we will view this short position as a worthwhile hedge.

Doubling Down

Our long position in UltraShort OTC is a much riskier play because it is a leveraged fund. Managers at ProFunds attempt to generate returns that correspond to twice the inverse of the performance of the Nasdaq 100. They utilize short-selling and trade stock index futures and options.

This position is not for the faint of heart, and I only view it as a reasonable consideration because it's one of more than 25 positions on my Recommended List.

I did consider simply shorting the Nasdaq 100 Unit Trust(QQQ) instead of buying USPIX, but the QQQ is only 16% above the near-term low it hit Sept. 21 last year, after dropping 24% from its highs. By contrast, even though USPIX is already up more than 30% from its recent lows, it is still nearly 50% below the highs it hit in early October.

There is clearly more risk and reward in USPIX, and given our bearish market outlook, we believe the odds are more in favor of realizing the upside than the downside of the equation. Should we be wrong on the market, our many long positions should more than offset the loss we will have from this fund.

Given the leveraged nature of the UltraShort OTC fund, we will be focusing more on its chart than our Insider Market Indicators to tell us when to close this position.

Many readers may find the fund difficult to enter. Schwab customers benefit from the fact that this is an offering on that firm's Mutual Fund OneSource service. This means there are no transaction fees, and the minimum investment is a manageable $2,500. Other places, the minimum for USPIX is stated as $15,000.

USPIX is a no-load fund with no 12b-1 fees . Its operating expenses are 1.48%, but a short-term redemption fee of 0.75% is also likely to come into play, as we doubt we'll hold this fund for more than 180 days.

Still Like Bradley

Despite InsiderInsights' bets against the market, I am still net long with more than 25 stocks on my newsletter's Recommended List.

One long continues to be drug company Bradley Pharmaceuticals(BPRX), and I'm sticking by my assessment that this stock is the cheapest way to play the promising "orphan drug" sector. The stock made it onto my list after it sold off in the wake of fourth-quarter results. Investors had been concerned that growth was cooling, but I disagreed.

The company's first-quarter numbers bear me out. Sales in the quarter grew 76%, allowing the company to earn a record 15 cents a share. EPS has now risen at least 20% sequentially for four straight quarters. A combination of higher unit sales, coupled with price hikes for key drugs, has been the catalyst for higher growth.

As noted in the initial recommendation of Bradley, other orphan-drug stocks like King Pharmaceuticals(KG) and First Horizon(FHRX) sport rich forward earnings ratios in the 25 to 35 range. Bradley's multiple is roughly half that, despite the fact that EPS is on track to nearly double. Another quarter of solid results may help Bradley to regain credibility.

For now, the company remains a wallflower with just one sell-side analyst following the stock. In time, though, more sponsorship is likely for this fast-growing orphan-drug stock. It may take time, but your patience should be nicely rewarded.

The stock is already up about 15% since making it onto my Recommended List, but I don't think it's too late to initiate a position.