Updated from 11:09 a.m. EDT
This was originally published on
on March 13 at 9:00 a.m.
This has been a great market for daytraders and Warren Buffett. Daytraders must be feasting on the volatility, and Buffett's honest-to-gosh long-term investment horizon allows him to sleep easily even if an opportunistic buy falls another 20% in the near term.
But for anyone in the money management biz needing to keep clients happy on a monthly and quarterly basis, the market has been downright evil. There have been few trends in U.S. equities that have worked for longer than a week or two, and it's been outrageously easy to see a perfectly good bet turn sour overnight.
There is one obvious months-long trend that I think seems a good bet to continue, however. Despite Tuesday's boffo price gains, I still think indices are more likely to be lower a couple months from now than not. So I'm still leaning bearish in the near term.
I started acting more bearish last Christmas. Since then I've made 16 new recommendations in my InsiderInsights newsletter. Thirteen have been shorts, and 12 of those shorts have been profitable. The one short that went against me has only cost me 2.0% so far, while the winning shorts have averaged a 20.1% gain. And that stat was calculated
Tuesday's bullish fireworks. On the flip side, only one of my three new longs since Christmas has gone my way.
So it's obvious that leaning bearish has been paying off, and I think the odds are high that the profits from shorting aren't played out yet. While Tuesday's rally was absolutely impressive, so was that two-week leg up we had back in January. That oversold rally was given extra fuel by short-covering, and it was still stopped dead when indices bumped their heads on their respective 50-day moving averages. That's about as simple a resistance metric as it gets, and the failure to breach it highlighted the larger downchannel indices still appear to be in.
If this resistance metric holds this time around, this rally is already more than half over. Of course, if the indices do break through their 50-day averages with gusto, I'll be eatin' crow big time. But when I weigh the odds of whether the current downward-sloping range will be broken on the up- or downside, I still think the latter is more likely. To break out on the upside, there would have to be fabulous news flow from government economists and corporate earnings. For the next few months, at least, I think the opposite is much more likely. And while the stock market is a forward-looking animal, I don't think we are far enough through this credit crisis for the animal to turn sustainably bullish right now.
But to heck with my top-down drivel. Reasonable minds can differ about where the indices are headed in the coming months. If I'm wrong and this latest rally really did mark the bottom for the year, I'll jump on board in short order.
If you're in the bearish camp yourself, however, the good news is that insiders are throwing up plenty of quality ideas via their selling activity. Too often, the insider approach is pigeonholed as a way to find good value stocks in a bull market. But as my recent experience illustrates, insider data are a much more versatile input to the investing process than that.
Three of my latest shorts are
American Public Education
. The thesis behind all three of these shorts is similar: Insiders are selling them even though their stocks have already fallen hard. That's always a red flag. Technically, all three appear to still be in solid downtrends. Fundamentally, all these stocks also appear pricey despite their stocks being well off recent highs. So even if the market does rebound, I expect these stocks to perform relatively worse than the numerous longs I am still in.
Google is the most controversial of these shorts. But then, it was also a gutsy call when I shorted it at the beginning of January. After just four weeks, I decided to harvest my 27.4% profit. It turns out I likely got out too soon.
When I first shorted Google in January, I admitted that the call was like a little tug on Superman's cape. Now, (with apologies to Jim Croce's estate), I'm at risk of spitting into the wind.
But recent data from comScore seem to indicate that the wind may be coming from behind me this time around. The paid-click report from comScore showed a year-over-year decline for Google in December. While comScore has tried to downplay the stats, I think they were only to be expected.
Economic concerns have beaten up so many sectors of this market already. The concept of an advertising-dependent firm also being vulnerable is hardly a stretch. Google may be a great company, but it will likely not be exempt from any increased frugality from consumers and advertisers alike if, as seems likely, the economy will get weaker before it gets stronger.
Meanwhile, GOOG remains a core holding for most tech funds, and maintains 30 "buy" or "strong buy" ratings from analysts. Even a slightest nod to pessimism by either side of this stock's support should make this short profitable, which seems much more likely than data and sentiment both suddenly reinforcing the religious fervor that still supports GOOG.
Insiders have never backed this stock. To this day, there has not been one open-market purchase by insiders of GOOG. That didn't look suspicious when this stock was soaring. But now that it is in a downtrend, the sales betray a lack of confidence in this stock's ability to regain its old highs anytime soon.
Sure, sales by the founders of Google are easily dismissed because of the honest need for those gentlemen to diversify. But there are plenty of mere mortals at the firm whose sales are leaving them with little or no direct holdings left to vacillate with the vagaries of the market.
Recent insider sales at Vocus are just as telling. The firm's shares started showing weakness in December after hitting all-time highs of just over $38. But that hasn't stopped five executives and directors from selling nearly $3.2 million worth of VOCS so far this year at an average price of just $25.41.
For several of the sellers, their latest divestitures represented a noticeable portion of their direct holdings. Director and co-founder (and past chief technology officer) Robert Lentz seems particularly interested in "diversifying" his holdings. He has sold more than half his direct holdings in the past year. Granted, Lentz has decided to retire. But his hurry to sell -- and acceptance of such a low price relative to past highs -- is a red flag.
It is also at odds with the company's recent financial performance. Vocus, which sells Web-based software for public-relations management, increased revenues by 44% in 2007, to $58.1 million. Non-GAAP EPS nearly doubled, to 50 cents. Vocus also raised its guidance for 2008 in its latest conference call. Management now expects sales to reach as much as $75 million, and non-GAAP EPS to increase to as much as 65 cents.
That's great growth when growth is at a premium in this slowing U.S. economy. The price for this growth appears to be the problem, however -- and understandably so. Even after falling 36% from its highs, VOCS still trades for 38 times the high end of 2008 expectations. That's a full-price multiple as far as I'm concerned, with no room for any hiccup in performance or investor sentiment.
The Book on APEI
Shares of American Public Education are likewise pricey. This online post-secondary education firm catering to military personnel may have fabulous profit margins, but its shares also carry a multiple of nearly 50 times the trailing EPS the company just announced. This would seem to leave little room for disappointment in this still-unseasoned company, which only came public last November.
That multiple is as high as it is even after APEI has fallen 29% from its recent highs.
Interestingly, three large investors in APEI -- and three more executives -- thought it an excellent time to sell a significant amount of their shares on Feb. 19 via a secondary offering. Alas, the firm itself only benefited from selling 25,000 of the total of more than 3.7 million shares sold. This was clearly an exercise in getting past investors out as quickly and cleanly as possible with their profits.
Considering APEI's valuation, I can't blame these institutional and executive holders for their actions.
Know What You Own
: Google operates in the Internet sector, and some of the other stocks in its field include
. These stocks were recently trading at ($28.11, -1.20%), ($28.60, -0.10%), ($26.32, -1.02%) and ($65.98, -0.80%) respectively. For more on the value of knowing what you own, visit TheStreet.com's
At the time of publication, Moreland was short Google, Vocus, and American Public Education, although holdings can change at any time.
Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site InsiderInsights.com and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback;
to send him an email.