3 reasons to go short in 2010

If you're looking for the easiest way to make money this year, it won't be on the long side.

By InvestorPlace Jan 20, 2010 4:45PM

Bear market © Hemera Technologies/JupiterimagesBy Michael Shulman, InvestorPlace.com

 

With the Dow making its biggest one-day drop since Oct. 30 on news about tighter lending standards in China and some disappointing earnings announcements, now seems like the perfect time to tell you why you should go short in 2010.

 

As was made abundantly clear today, there are numerous unresolved issues that threaten to derail or a least delay any meaningful economic recovery in the year ahead. (See 10 Reasons the Economy Will NOT Recover in 2010.) While the Street may choose to ignore them for a while longer, you can bet your britches we won't be seeing the market rally like it did last year.

 

Even if the overall market treads water or claws its way higher, it will not be the indiscriminate rally we saw in 2009, so there will be plenty of fantastic shorting opportunities in the year ahead.

 

I want to share three reasons you should be shorting stocks in 2010, and I'll throw in some potential stocks to short.

 

1. A return to fundamentals

 

The new year started the way last year ended, with a return to fundamentals. The rally we experienced in 2009 was largely technical in nature, and it drove virtually all stocks -- good and bad -- higher. However, toward the end of 2009, investors began to pay more attention to fundamentals, and this trend will continue in 2010.

 

As investors put the irrational exuberance of 2009 behind them and focus on the fundamentals of companies and market segments, you will see a divergence between the "good" stocks and the "bad" stocks. And the fundamentally unsound companies will make excellent shorting candidates in 2010.

 

2. Stocks go down faster than they go up

 

With almost zero chance of a repeat rally in 2010, and a renewed focus on fundamentals, good, old-fashioned stock-picking will come back into fashion in the new year. And while there is money to be made on the long side from the fundamentally sound stocks, there's even more money to be made by shorting the lousy ones that ran up way too high in 2009.

 

This is because you can make more money and you can make it faster when a stock goes down versus when it goes up. Think about it: Citigroup (C) went from $40 and change to a buck in just 18 months. It won't be $40 again (if it is still in business) in 10 years.

 

3. Lousy companies will be punished in 2010

 

There are more companies waiting to blow up in 2010 than I have seen in many years. In 2007, when the market was up 3.5%, the typical position in my ChangeWave Shorts service was up 51%. A lousy company is a lousy company, and the only year since the Internet bubble that they were not punished by the market was 2009. This will change in 2010.

 

Many companies will report higher profits in 2010, but this will also be the year of the broken balance sheet and stalled growth. And while higher profits may satiate the Street in the first half of 2010, beginning in the third quarter, the Street will want to see growth in revenues as well as profits, and will punish companies not providing it.

 

Looking for some good shorting opportunities? Well, just use common sense. Are you going to buy a boat from Brunswick (BC), a Hog from Harley-Davidson (HOG), a diamond from Zales (ZLC), a Pre from Palm (PALM), or a new home from KB Home (KBH)?

 

Well, neither are most people in a recession. (Get two more reasons you want to go short in 2010 and some ETF picks to do so here.)

 

At the time of this writing, Michael Shulman did not hold positions in BC, HOG, ZLC, PALM or KBH in personal or client portfolios.

 

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