Short Selling Overvalued Stocks
Willem J. Fourie
Reverse Value Investor
Welcome to my corner of the internet, pleased to meet you. I have a conjoint degree in Finance and Statistics, have passed two levels of the Chartered Financial Analyst qualification, and lead a team focused on data-driven predictive modeling in the credit risk space (not equities) for a retail bank in New Zealand.
However, my passion is share trading and investing, especially when it comes to spotting overvalued or overbought stocks. I’m what you’d call a reverse value investor — I focus on making a profit when these overpriced stocks drop. This platform is all about sharing that passion with others who find shorting overvalued stocks as exciting as I do. It’s a niche that doesn’t get much attention, but I think it’s full of untapped potential.
Here, I don’t provide financial advice or tell you which trades to make. Instead, I offer a fresh perspective on whether a company’s future potential earnings justify its current share price—or what kind of future earnings the market is already pricing in.
As a reverse value investor, I take a unique approach to share price analysis. Instead of determining what a stock should be worth, I reverse-engineer the market’s valuation to identify the level of future earnings the market expects to justify the share price. Then, I evaluate whether such earnings are realistic. If not, the stock might just be an opportunity waiting to be shorted.
Stocks Covered
I tend to focus on stocks that capture widespread attention—those surrounded by significant hype and experiencing rapid, substantial price appreciation. These stocks are often overbought, attracting many retail investors who may not fully understand the crucial relationship between a company’s fundamentals and its market valuation.
It’s important to remember that great companies are not always great investments—at least not at any price. Even the best companies can be poor investment choices if their stock prices far exceed their intrinsic value. The key lies in determining a price that aligns with the company’s true earning potential and long-term prospects.
If there’s a specific stock you’d like me to evaluate next, I’d love to hear from you. Feel free to get in touch—I’m always open to suggestions and discussions about uncovering true value in the market.
How to profit from falling prices?
Fundamentally speaking, overvalued shares will eventually correct by falling in value. Shorting, or "going short," is a way to profit from a decline in a share’s price. Unlike traditional investing, where you buy low and sell high, shorting flips the order—you sell first and then aim to buy back later at a lower price. The process begins by borrowing shares from someone else, selling them at the current market price, and then waiting. If the share price drops as expected, you can buy the shares back at the lower price, return them to the lender, and keep the difference as profit. However, if the price rises, you’ll have to buy back at the higher price, resulting in a loss.
Short selling is not for everyone - there are many risks for the uninitiated. For example, there is theoretically no limit to how high a share price can climb, meaning potential losses could be very large. Just because analysis may indicate that a share is overvalued or overpriced, doesn't mean market hype couldn't drive its stock price even higher.
Shorting is useful in many ways. It allows traders to profit during falling markets or allows reverse value investors to profit from stocks they believe are overvalued. It’s also used as a hedging strategy, helping investors protect their portfolios from downside risks by offsetting potential losses elsewhere. Additionally, shorting can play a role in correcting overinflated stock prices, bringing them closer to their fair value.
What are CFDs?
Contracts for Difference (CFDs) have made shorting simpler and more accessible - and are my preferred method for shorting stocks. With CFDs, you don’t borrow or own the underlying shares. Instead, you speculate on price movements through an agreement with a broker. If you think a share’s price will fall, you can sell a CFD on it at the current market price and buy it back later if the price drops. This approach eliminates the need to physically borrow shares. CFDs also offer leverage, meaning you can control a larger position with less of your own money down, and in some cases you even earn interest on the money you borrow for your CFD trade.
While CFDs make shorting more convenient, they come with risks. Leverage can magnify losses as well as gains, and there may be fees for holding positions overnight. Whether using traditional shorting methods or CFDs, success requires thorough research, careful planning, and disciplined risk management.