Four Tech Stocks Analysts Have Soured On

January 24, 2014

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2 min read

Shorting, or betting that a stock’s price will fall, seems on the surface to be an inherently nasty proposition. That is, as opposed to investing long, where one is providing capital to a company in hopes that it can grow and prosper, the trader is hoping that the company will fail. Instead of profiting off of growth, the short trader profits off of destruction.

But that’s a limited view of shorting, and does disservice to its positive benefits. Namely, that short-sellers act as a kind of “real-time detective” that ferrets out companies that deserve to fail. A short-seller acts as a kind of check and balance in the market drawing attention to equities that are overvalued or even outright frauds. If the short-seller is correct, they can claim to have done their part to root out market inefficiencies while also claiming a tidy profit, of course.

To find potential shorting opportunities, we decided to go into one of the fastest growing, and thus possibly overinflated, segments of the stock market: the Tech sector. We went further, limiting our search to small-cap plays. The reason we did this was that small-caps, with their relative stability (compared to micro-caps) and potential for astronomical growth are a favorite of traders playing long. Shorting small-cap techs is the yin to that yang, so to speak.

To isolate stocks that might fall, we ran a screen of every tech small-cap and limited our search to those that had an analyst consensus of “sell.” After doing so, we found four actively traded equities that fit our search for shortable small-cap tech stocks. They are: