3 min read

1 New Buy (by Selling Short): Retailers Look Weak

There's a time and place for selling short a stock - or the stock market.

A good example was back in September last year, and again in March/April this year. In those time frames, the charts of many groups of stocks, from semiconductors to retailers to the market itself - all looked doubtful.

But out of the group of shorts I've put in the goodBUYs portfolio thus far, only Target (TGT) is lower now than it was at the time of the short sale:

The point being...the trend is our friend, in shorting a stock that we hope will go lower - just like it is when we go long and buy a stock, hoping it will go higher.

With that in mind, I'm putting in a new short-sale opportunity of Dollar Tree (DLTR) in the goodBUYs portfolio.

I'm going to short the shares of Dollar Tree (DLTR) as a bet on an overvalued retailer stock in a (potentially) weakening economy, and whose chart has some clues on weakening shareholder support.

Using the Hidden Formula page on the website, here's what the trade will look like using the current market price as our short-sale entry price, and $170 as our "sell at a loss price":

So using the Formula, it's telling me I can short 4 shares - and if I'm wrong and the stock rises to $170, I'd lose 1% of the portfolio's $10,170 current value (or $170).

In this way, we can add a number of short positions over time (just like we add long positions over time) and - if the trend is our friend - build additional profits in the portfolio.

Reason for Shorting

Dollar Tree is a great company. I shop there all the time myself. But I think we can make the case the stock is somewhat overvalued. And we can see evidence of that overvaluation by the series of "declining tops" on the chart - a series of "lower highs" made by the stock over the past 14 months.

We can also make a case that the stock is ripe to fall by looking at a basic valuation measure like DLTR's price/earnings (P/E) ratio.

In the chart below, the blue line shows the stock's fluctuating P/E ratio over the past decade. The pink line is the stock price.

As you can see from the chart, it's been half a decade or so since the stock last traded at this high of a valuation measure.

And of course, the prior decade was a period of lower-and-lower interest rate levels. Now, interest rates are at a 12 year high.

Of course, it's also possible that this short-sale goes against the portfolio. We always have to be aware of risks - which is why I've put the "sell at a loss" price up at the $170 level near Dollar Tree's prior all-time highs.

So let's see how this trade works out!

Best of goodBUYs,