By Scott Rubin
For the uninitiated, the answer to the title of this article may seem obvious - of course shorting overvalued stocks is a good investment strategy. What other kinds of stocks would you want to short? Certainly not an undervalued stock, right? Since valuation is far from a hard science, maybe we should refine what type of "overvalued" stocks we are talking about.
For the purposes of this article, I am talking about "seemingly" overvalued stocks using all of the traditional valuation metrics - i.e., P/E, PEG, Price/Book, Price/Sales, etc. In order to get an even better define the term "seemingly overvalued," let me provide you with some examples. Salesforce.com (CRM) trades at a trailing P/E of 245, a forward P/E of 87, a PEG ratio of 4.92, a Price/Book of 14.7, and a Price/Sales ratio of 11.46. Looks to be overvalued, right?
Well, CRM has gained 83% in 2010. Would you want to be short? That wouldn't have worked out too well. How about Acme Packet (APKT)? This stock trades at a trailing P/E of 97.64, a forward P/E of 53.33, a PEG ratio of 2.40, a Price/Book of 12.19 and a Price/Sales ratio of 17.13. Using normal metrics, this name would appear to be "overvalued." But, the stock has appreciated more than 400% in 2010. It just keeps getting more and more "overvalued."
In fact, many of the best performing stocks in the market today would appear to be wildly overvalued using normal metrics. This includes, Chipotle (CMG), Amazon (AMZN), Riverbed Technology (RVBD), and F5 Networks (FFIV), to name a few. These are all stocks that you should have been buying, not shorting. In 2010, stocks with high P/E ratios have trounced their cheaper peers.
