Bill Ackman is no stranger to short selling. In an interview with Value Investor (login required), the hedge fund magnate revealed the rules behind his short selling strategy. Specifically, Ackman declared that he would not short a company based purely on valuation alone (rather, Ackman will only bet against a company that he believes has broken the law, has misleading accounting, or faces regulatory issues).
However, in contrast to Ackman, there are many traders who are quite eager to bet against companies based purely on the belief that they are “overvalued.” These companies include Zillow Inc (NASDAQ:Z), OpenTable Inc (NASDAQ:OPEN) and Lululemon Athletica inc. (NASDAQ:LULU).
Zillow has a short interest above 30% and a PE ratio near 290
The online real estate database has attracted the interest of rabid short sellers, who look at the company’s financials and are eager to bet against it. To be sure, Zillow trades at a nosebleed valuation: its price-to-earnings ratio (a comparison of its past earnings to its share price) is roughly 16 times greater than the broader S&P 500’s.
The company pays no dividend, and its forward PE of 66 (predicted future earnings compared to share price) is nearly double that of Facebook Inc (NASDAQ:FB)’s — a company that trades at a high valuation in its own right.
But valuation is really the only grounds short sellers have to fault the company; it faces no known regulatory issues, has not been criticized for its accounting, and no one has accused Zillow of breaking the law.
OpenTable has a short interest over 25% and trades with a PE of 59
Relatively speaking, OpenTable Inc (NASDAQ:OPEN) isn’t as overvalued as Zillow Inc (NASDAQ:Z). Its PE ratio of 59 is a far cry from Zillow’s 290, but still about three times greater than the S&P 500’s. Like Zillow, it pays no dividend.
In addition to being relatively expensive on paper, OpenTable Inc (NASDAQ:OPEN) shares have performed tremendously and could be ripe for a pullback. In the last year alone, shares of OpenTable have traded up over 40%.
But again, like Zillow Inc (NASDAQ:Z), OpenTable has not been targeted for its accounting standards, legal violations, or regulatory issues.