Caesars Entertainment Corp (CZR), Nokia Corporation (ADR) (NOK): Dangers of Shorting Stocks on Display This Year

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Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) are two popular shorts based on the insane valuations both companies have garnered. Neither seems to be able to make a consistent profit, and in the case of Amazon there doesn’t seem to be any real desire by management to make a profit long term.

NFLX Net Income TTM Chart

NFLX Net Income TTM data by YCharts

Yet both stocks continue to rise despite little earnings power. Netflix, Inc. (NASDAQ:NFLX) has at least made a $47 million profit in the past year, earning a 369 P/E ratio, while Amazon.com, Inc. (NASDAQ:AMZN) is losing money and still has a $134 billion market cap.

Shorting stocks based on valuation can be even more dangerous than shorting bad companies. You never know how long the market is going to give stocks that look overvalued a pass, and it’s possible they’ll just become more overvalued in the future, even if the value doesn’t make any logical sense.

Shorting is a dangerous game
This year is showing exactly why shorting stocks is so dangerous. You have unlimited downside, and when the market becomes irrationally exuberant about an investment you can be left in the dust, even if the company is losing money or has terrible future prospects.

The article Dangers of Shorting Stocks on Display This Year originally appeared on Fool.com.

Fool contributor Travis Hoium manages an account that owns shares of Apple and Microsoft and is personally short shares of Amazon.com. The Motley Fool recommends Amazon.com, Apple, Ford, Google, Netflix, and Tesla Motors and owns shares of Amazon.com, Apple, Ford, Google, Microsoft, Netflix, and Tesla Motors.

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