Shorting stocks can be a treacherous game. While your maximum gain on a short sale is 100% -- which you'd make if the business you sold short went bankrupt and its shares were deemed worthless -- your potential losses can be multiples of your original investment. Companies like Amazon.com and Under Amour have crushed countless short sellers in recent years as their stock prices have grown exponentially, and with their growth stories still intact, they remain two stocks I would not short today.
Amazon.comArguments for shorting Amazon usually center on valuation concerns. The e-commerce giant is notorious for failing to produce much in the way of net income, and its stock's sky-high price-to-earnings multiple can be a vicious siren that tempts short-sellers to bet against it, often at their own peril.
Yet Amazon's net income has long been affected by the heavy investments the company is making to fuel its torrid growth. These investments have allowed Amazon to build a dominant position in e-commerce, and its competitive moat continues to grow stronger by the day.
It's these advantages -- such as Amazon's massive fulfillment network, blossoming Prime membership service, and AWS infrastructure -- that are helping to drive Amazon's impressive revenue growth. In time, these aspects of Amazon's business should also help to drive its profits substantially higher. And it's based on this future profitability that Amazon's shares are valued.
The shorts would have you believe that this is a false hope, a mirage of profits seen only by far too optimistic investors. But Amazon's recent financial results prove that this so-called illusion may be in fact real; the company's stock surged after delivering second-quarter earnings that far exceeded Wall Street's estimates, boosted by rising operating margins and strong growth in its high-margin AWS business. I believe these are signs of what's to come for Amazon, as well as why short-sellers are likely to continue to be punished for betting against this e-commerce juggernaut.
Under ArmourUnder Armour is another seemingly always-expensive looking stock, yet it too has been a monster winner for its shareholders and a soul crusher for short-sellers.
The sports apparel company's stock tends to trade for a significant premium based on traditional metrics such as P/E earnings multiples, even when factoring in its impressive growth rates. That's made it a frequent target of short sellers. Yet with an array of exciting growth catalysts likely to continue to turbo charge Under Armour's results in the years ahead, and a market cap that's still only about one-fifth the size of market leader Nike's (even after a nearly 10-fold increase in UA's stock price over the last five years), investors have been willing to pay a premium to own a piece of Under Armour's awesome potential.
But it's not just Under Armour's future prospects that have investors excited. The company has been rewarded for its impressive track record of operational execution, including 21 straight quarters of 20+% revenue growth. That five-year streak of consistently excellent performance has been the bane of many Under Armour short-sellers' existence. And if you believe that winners tend to keep on winning, as I do, it's also a major reason to not bet against Under Armour today.
The article 2 Stocks Too Dangerous to Short originally appeared on Fool.com.
Joe Tenebruso has no position in any stocks mentioned. The Motley Fool owns and recommends Amazon.com and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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