Is Now the Perfect Time to Short Stocks: HomeAway Inc (AWAY), Hewlett-Packard Company (HPQ)

2. Hewlett-Packard Company (NYSE:HPQ)
It’s no secret that this hardware and software titan has lost its way in recent years. The company pulled off a series of growth-inducing acquisitions during the past five years, though fiscal (October) 2012 revenue of $120 billion was just 2% higher than fiscal 2008 revenue. On an organic basis, this company’s top line is shrinking. Of much greater concern is the steady fall in free cash flow, which is never a good sign for a company with nearly $30 billion in long-term debt.

Hewlett-Packard’s Shrinking Free Cash Flow

The fact that analysts expect HP’s revenue base to shrink further in coming years means more pressure on free cash flow.

Still, shares have doubled in value since mid-November (adding a hefty $22 billion in market value) on hopes that free cash flow trends can reverse course. Although the company formally anticipated free cash flow to fall to just $5 billion this year, Morgan Stanley thinks the figure will rebound to $6.7 billion. But here’s the problem with that analysis: $800 million of that amount will come from a one-time reduction in working capital, while another $500 million will come from major cut to capital spending, which is hardly the right move for a company in need of long-term growth.

Still, short sellers can’t fight a bullish tape, and in the two weeks ended March 15, they covered roughly 6 million shares that were held short. For investors looking for fresh short-selling ideas, HP’s rally has counter-intuitively set up the next short sale trade opening.

Risks to Consider: If the market keeps rising, the short covering may continue, helping these stocks to move still higher.

Action to Take –> Although HomeAway and Hewlett-Packard have been clear beneficiaries of the massive wave of short covering, many other stocks have as well. That makes this a good time to keep an eye on short interest levels in any stocks that have made a strong upward move in 2013 and short them if you think they’re headed for a correction.

This article was originally written by David Sterman, and posted on StreetAuthority.