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Weekend Edition

The Best of The S&A Digest
Saturday, July 3, 2010

In a speech to the CFA Institute in Boston last month, short-selling whiz Jim Chanos explained the four best areas to look for short sale opportunities:
1) Booms that go bust
2) Consumer fads
3) Technological obsolescence
4) Structurally-flawed accounting
You may recall Porter's February issue of Stansberry's Investment Advisory, where he explained where he looks for short ideas (his list is similar to Chanos'):
To sell stocks short, you need to know the three basic approaches. First, you look for frauds. The second approach is to pick out overly indebted firms, like General Electric. These are probably my favorite situations in all of finance. The last category of stocks you should sell short [are] companies whose business model has disappeared because of technological innovation. – Porter Stansberry, February 2010, Stansberry's Investment Advisory
In the same issue, Porter recommended selling short the two leading hard-drive manufacturers, Seagate Technology (STX) and Western Digital (WDC). He believes so-called "cloud computing" and flash memory will prove hard drives obsolete.
His readers are up about 30% on both his Seagate and Western Digital shorts in four months.
We wrote it. Did you short it?
Our first [short position] of 2010 will be on the shares of Barnes & Noble (NYSE: BKS). The problems of book retailers are obvious: More and more people are reading books and magazines electronically. This greatly reduces demand for paper-based media, whether softback, hardback, or periodical. Worse, the best buyers of books are the most likely to switch to Amazon's Kindle reader or Apple's new iPad. And since the Kindle and iPad are fighting for market share, the price of books themselves has plummeted – especially for hardback titles.
The price war will devastate Barnes & Noble. Selling books has always been a low-margin business. Barnes & Noble lives on a razor-thin 3% operating margin. It simply cannot afford a decrease in top-line revenue. And there's no doubt that will happen this year. Look at what has already happened to Barnes & Noble's top competitor, Borders. Borders revenues fell 13% over the last year... – Porter Stansberry, February 12, 2010, Put Strategy Report
We wrote it again. Did you short some more?
Today, with volatility even more depressed, I think it makes sense to buy a naked put – if we can get a good price on the puts. Right now, the BKS January 2012 $20 put (the at-the-money option) is trading for between $5 and $5.50...
I expect the shares to fall sharply because it will be increasingly difficult for Barnes and Noble to earn a profit selling hardbound and softbound books at retail locations, thanks to the lower price and great convenience of buying books through national wireless networks...
I believe there's a secular and permanent change taking place in the book industry that will be cataclysmic for Barnes and Noble – just as it has been for its competitors. If I'm right, revenues will begin to decline rapidly, the stock's dividend will be eliminated, and its share price will fall by 50% over the next 12 months – at least. If this comes to pass, the options you pay $5 for today will be worth at least $10 by this time next year. – Porter Stansberry, March 12, 2010, Put Strategy Report
The puts Porter recommended buying are currently asking $9.90. If you took our advice in Put Strategy Report, you've essentially doubled your money in only three months.
But you don't have to trade options to make money on our short recommendations. Barnes & Noble hit a new 52-week low this week. The stock has plummeted from more than $20 at the time of the short recommendation to about $13 today.
Stansberry's Investment Advisory readers who simply shorted the stock last month are up more than 30%.
In total, Porter's subscribers are up on all but one of his seven short recommendations. And his latest short recommendation, from the June issue, will soar as Europe's fiscal troubles continue. To learn more about Stansberry's Investment Advisory, click here...
S&A Investment Research

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