Too Wimpy To Short High-Quality Danaher

Short sellers sometimes get hung up on stocks of high-quality, highly-valued companies.  Harley-Davidson (HOG), Starbucks (SBUX), and CH Robinson (CHRW) have all shown steady, consistent growth in earnings and cash flows in rather mundane businesses.  Short sellers who believed the growth would eventually hit a wall, have usually been the ones to get badly hurt. 

It's with this important caveat that I present the case to short Danaher (DHR), for a trade.  Danaher is a industrial conglomerate that manufactures various types of testing, measurement and motion equipment.  It also makes hand tools.

In looking for short trades, I typically use the weekly DeMark Sequential (TM) and Combo (TM) indicators to find stocks that are over-extended.  I then drill down to the daily to pick a good risk/reward entry point.  Sometimes, I'll even start on the monthly charts and then drill down to the weeklies and then the dailies.  And DHR shows all the topping signs on a Monthly, Weekly and Daily basis based on the DeMark indicators. 

The monthly DeMark Sequential (TM) registered a 9-13-9 sell set up in July...

Source: Bloomberg

...the weekly DeMark Sequential just hit a 9 sell set up this week...

Source: Bloomberg

and the daily DeMark Sequential also recently hit a 9-13-9 sell set up. 

Source: Bloomberg

The other reason to make a bet against DHR is that everyone loves the stock already, as the analysts ratings and valuation show.  According to Yahoo Finance, almost 80% of the analysts who cover DHR have a buy rating on the stock.  If everyone already knows how great the stock and the company is, who is left to buy?

The valuation also reflects all the good news.  DHR trades at the top of it's historical P/E and P/S range.  It's also trading about 50% higher than the comparable companies in its industry.

Source: Baseline

While DHR is a very good company, the margins and Return on Equity have deteriorated somewhat in recent quarters.  In addition, the earnings could come under pressure as they have at Black and Decker (BDK) and Illinois Tool Works (ITW) which have both seen a slowdown because of the bursting of the housing bubble. 

Source: Baseline

However, the trade does have some negatives.  First, it's not undiscovered.  The put/call ratio has exploded in the past weeks as many traders have started betting against the stock.  The chart on the right comes from Schaeffer's Research.

Also, there's nothing really that wrong with the fundamentals of the company, yet.  While analysts can point to the lower margins and ROE, the company continues to report strong earnings growth.   Earnings estimates have, in fact, continued to go up in the past two quarters.

Source: Baseline

All in all, I think this could be a good short term trade if the market rolls over.  However, I'm not sold (short) on it, yet, because I don't generally like shorting good companies.  But I present the idea for traders with greater risk tolerance than I have. 

Comments

[BHCO]

Hello,

I invite you to my blog

BHCO.blogspot.com

It would be nice to get some feedback from you.

BHCO

[boris chikvashvili]

"Catch 22"... Did You?

On Last Friday Rally the SELL PRESSURE, Our Proprietary Indicator, has reached extreme high again. Market has managed only one day of churning and started decline.
We updated our http://borisc.blogspot.com yesterday. See the notes about the “Freak Show”.
Talking about Freaks… Our creator must have had his/her own brand of freak love for symmetry. Look at S&P top ( Mar-August 2000 ) , bottom (Oct2002-Mar2003) and top?! May-Oct2006. So you tell me if the man/woman has no sense of humor? They are all 22 week long.
See the picture at http://borisc.blogspot.com

Our prediction is that the top is near at the resistance points previously outlined. Now, please see the probabilities of dates for tops.

Oct 18 2006 +-2 days Probability 25%
Nov 03 2006 +-2 days Probability 50%
Nov 18 2006 +-2 days Probability 25%

Oh, yes, did you see the baby cup of BKX underflow? See your Favorite chart site.

[boris chikvashvili]

I am neither bear or bull, I just make money.
So I have submitted to safehaven.com an article at 8:40 ET today.
It should publish soon.
The idea in it is to sell the QQQQ against 43.30 Year high
with a very small stop loss.
How Small is the stop?
No more than 31 cents, at 43.61
The time for the top should be around 12pm or 15pm
Good trading

Go To http://borisc.blogspot.com for updates

[boris chikvashvili]

I am neither bear or bull, I just make money.
So I have submitted to safehaven.com an article at 8:40 ET today.
It should publish soon.
The idea in it is to sell the QQQQ against 43.30 Year high
with a very small stop loss.
How Small is the stop?
No more than 31 cents, at 43.61
The time for the top should be around 12pm or 15pm
Good trading

Go To http://borisc.blogspot.com for updates