3 Investments on My Short List
The old saying "what goes up must come down" doesn't always hold true in investing, but sometimes investments climb so far that betting on their downfall is a wise move. In my beginning investing series article, I explained one short strategy called a pairs trade that is a good way to get your feet wet shorting stocks.
For those a little more adventurous, I have identified three investments I've been itching to make an outright short sale on.
It's worth as much as people think it's worth
Gold is going to rise forever. The U.S. is printing money like no tomorrow, the EU is going down, and the only safe haven is gold. Or that's what everyone would like you to believe.
No, the market won't be freaked out forever. Eventually the EU will get their debt issues figured out, quantitative easing will end, and the U.S. won't be running a $1.5 trillion budget deficit. I swear that day will come ... eventually.
And when it does, gold won't be the safe haven it once was. Fellow fool Matt Koppenheffer recently gave his reasons that he thinks gold is a bubble that may be about to burst. My reasons are much more psychological in nature and feed into the irrationality of the market. Every few years the market falls in love with an investment and it climbs like it's never going to end.
Eventually the general population jumps on board, and you know that investment is about to crash. In the '90s it was Internet stocks, in the 2000s it was real estate, and now it's gold. Judging by the giddiness I hear about gold from taxi drivers, bartenders, and fellow bus riders, I think gold has gotten a little too hot for its own good.
Even famous investors like George Soros have starting to give gold the cold shoulder recently, so now might be the time to begin shorting. Miners like Paramount Gold (ASE: PZG) and Golden Star (ASE: GSS) can move drastically based on production news in the short term. But I would much rather short a gold ETF like SPDR Gold Trust or buy an inverse ETF like DB Gold Short ETN.
This crash could be epic
The rise in gold has nothing on the meteoric rise in the price of rare earth elements over the past year. Export of the difficult-to-mine elements was restricted in China last year, which caused shortages in the market and a sharp rise in prices. As an example, lanthanum oxide has risen from $8.71/kg to $80.00/kg and cerium oxide has jumped from $4.56/kg to $80.00/kg since 2008.
Since these elements made up a very small portion of the cost of a wind turbine, hybrid car, or hard drive, industry was willing to pay the extra cost. But now that costs are through the roof, the world has taken notice.
But in free markets, when prices rise like rare earth elements have, the status quo rarely stays the same. Miners have been raising funds and exploring new opportunities because of the high prices. Molycorp (NYS: MCP) , which will open a mine that once supplied most of the world's rare earth elements, had an IPO last year, and its stock has gone through the roof since then, despite its setback last week. Rare Element Resources (ASE: REE) and Avalon Rare Metals (ASE: AVL) have both raised funds, and while they're years away from any possible production, their stocks have performed well until recently.
But in the world of rare earth elements, a single mine can make a serious move in the world's supply and therefore prices. Lynas Corporation recently opened a mine in Australia, and prices for the elements Lynas provides have already started to fall from even higher prices earlier this year. We should see the same effect when Molycorp's mine opens and as more supply will come online in coming years.
When prices begin to fall, margins will fall, profits will plummet, and Molycorp's stock price will likely continue to fall. In January I predicted that Molycorp would become a great short candidate this fall, and now that fall is here, rare earth element prices are falling, the stocks are starting to tumble, and I'm feeling like it's time to put some money behind my prediction.
The slow death of Las Vegas
Las Vegas is America's adult playground. We can get in a world of trouble and, if the commercials are correct, no one will ever know. But Las Vegas has fallen on hard times recently as gaming revenues plummeted during the recession. Bottles of Cristal and thousand-dollar tabs at a fancy club seemed a little less necessary with unemployment rampant throughout the country.
Which is why I think MGM Resorts (NYS: MGM) is a great short candidate right now. Simply put, the stock is way too expensive.
MGM is sitting on $12.8 billion in long-term debt and generated just $1.2 billion in property EBITDA from wholly owned operations over the past year (not including small losses at CityCenter). Yes, MGM owns 51% of a casino in Macau, but that simply isn't enough to make up for the lack of value in Las Vegas. CityCenter is a complete disaster financially, and may even have to have one of its hotel towers imploded (although cost to MGM is unclear).
Crazy or sly like a fox?
I've laid out my case for these short investments, now it's time for you to weigh in. Would you short gold, rare earth stocks, or MGM Resorts? Leave your thoughts on those picks or short picks of your own in our comments section below.
Keep up to date with each of these stocks by adding them to My Watchlist, which will find all of our Foolish analysis on this stock.
- Add Rare Element Resources to My Watchlist.
- Add Paramount Gold Mining to My Watchlist.
- Add MGM Resorts International to My Watchlist.
- Add Molycorp to My Watchlist.
- Add Las Vegas Sands to My Watchlist.
- Add Golden Star Resources to My Watchlist.
- Add Avalon Rare Metals to My Watchlist.
At the time this article was published Fool contributorTravis Hoiumdoes not have a long or short position in any company mentioned, yet. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdingsor follow his CAPS picks atTMFFlushDraw.Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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