I'll admit I know very little about shorting. Equity research is not known for its abundance of sell ratings. But, as I contemplate a move to the buyside, I am trying to learn.
It seems to me that successful shorts target companies with at least one of the following:
(1) Blatant overvaluation (e.g. Facebook)
(2) Failing business models (Best Buy, Newspapers)
(3) Companies with incompetent management, fraud, misleading accounting, etc. (Enron, Allied Capital)
But overvalued companies can stay at frothy valuations for years. And companies in dying industries are usually dirt cheap already. And finally signs of fraud may be dismissed by the market, assuming that you can find evidence in the first place. While reading through a 10k and discovering some sort of Enron-esque cover up sounds great in theory, I realize that I am not likely to see something the entire market is missing.
Clearly shorts require catalysts more than long ideas. Beyond obvious catalysts like "missing expectations" or "being investigated by the SEC", what are some of the more subtle catalysts you have used?
How do you guys develop short ideas? What does it take for you to short a stock?