Three types of shorting candidates

The best way to find a short is identifying big controversy around VALUE. Three potential sources”

1. Fraud

High P/FCF or lack of FCF but relatively lower P/E brings questions about accounting quality.

Check financials to find cases where cashflow disconnections from accounting earnings

Case study: ProQuest

2. Failure

Proposed turnaround, acquisitions/integrations, etc, often creates challenges for even above average managers, particulalry in an adverse operating environment.

Check out recent acquisitions/restructuring news to source ideas.

Case study: GM, AMWD

3. Fad

Any hot topics invite attention

Ask neighbor and friends not in money management business (e.g. barber) to see what they’re buying.

Case study: ethanol plays

Combined with high valuation and high financial leverage, the three types of stocks could be perfect shorts.

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