Best long/short assets to buy now feature an industry titan that can influence the lives of millions of Americans and businesses.
The best stocks to short include a legendary financial institution and a financial technology (fintech) company seeking to revolutionize the mortgage and lending industry. Many retail investors often focus solely on buying stocks they believe will increase in value, but doing so may cause them to miss profiting from overvalued companies.
Short-selling can be an excellent way to generate positive returns and hedge an investor’s portfolio against potential market downturns. In sum, short-selling involves betting against a company’s potential stock price increase.
A short-seller will borrow a stock and sell it at today’s price. The short-seller will then buy back the stock at a predetermined future date to return it to the individual or institution who lent them the stock. If the stock price goes down, the investor pockets the difference.
Short-selling is an advantageous strategy during market downturns or periods of economic recession when stock prices are falling. Even during periods of strong market performance, implementing a long/short strategy (buying some companies while shorting others) can significantly reduce a portfolio’s volatility and risk. A long/short approach will mitigate the effects of unexpected negative returns.
However, short-selling is riskier than investing traditionally in a stock. The potential losses are far greater when short-selling, and a company may stay overvalued longer than expected. However, short-selling the right stock can generate enormous returns. Just ask recent Tesla (NASDAQ: TSLA) short-sellers.
To help you properly harness this potent investment strategy, we have identified one stock to buy and two to short to reduce risk and maximize potential returns.
3 Best Long/Short Assets to Buy Now: #3
Alphabet Inc Class A (NASDAQ: GOOGL)
Alphabet Inc Class A (NASDAQ: GOOGL), founded in 2015, is the parent company of Google and 160 other subsidiary companies. Headquartered in Mountain View, California, the corporation possesses a $1.1 trillion market capitalization (market cap). Unlike its Class B (NASDAQ: GOOG) shares, Alphabet’s Class A stock grants its holders voting rights.
The implications of going “long” on a stock are represented in its terminology. Investors expect stocks they invest in to generate significant cash flow and returns for a “long” time. As a result, long investors seek companies with strong financials, defensible market positions and strong growth. Alphabet offers all three.
Jeff Bezos declared, “you can climb the mountain, but you can’t move it.” The “mountain” Bezos was referring to? Alphabet. The technology giant controls 92.5% of global search and 64.5% of the worldwide browser market.
Google has become so dominant that the success or failure of a business often hinges on its ability to show up on the first page of Google’s search results. A company’s exposure on Google has become so vital that it has spawned a $70.9 billion search engine optimization and consulting industry. The prominence and integration of Google’s suite of products (Google Search, Google Maps, Gmail, etc.) into consumers’ and businesses’ everyday lives and operations have made Alphabet’s core business unassailable.
As a technology company, Alphabet possesses a nearly unlimited ability to scale, especially in its Google-related businesses. It costs the company very little to provide additional internet search results, global position system (GPS) guidance or cloud storage solutions for each new customer. The company has a remarkable 23.8% profit margin compared to the S&P 500’s 11.1% average.
Alphabet’s large profit margins allow it to invest heavily in research and development (R&D), including $31.6 billion in 2021 alone. While Apple (NASDAQ: AAPL) is a force in consumer electronics and Tesla commands the electric vehicle market, Alphabet’s R&D power has enabled it to expand into many industries. The company has invested in robotics (Intrinsic), wellness (Fitbit) and smart-home (Nest), to name just a few. Alphabet’s 160-plus subsidiaries allow the company to avoid growth stagnation.
Growth stagnation is a significant problem for many major companies. Only so many consumers are able and willing to purchase a particular product.
Even mighty Apple is facing growth stagnation, with iPhone unit sales peaking in 2015. The company stopped reporting iPhone, iPad and iMac unit sales figures in 2018 as the number of new customers declined.
Alphabet can achieve greater market penetration than other corporations due to its core products being free, creating a low switching cost for consumers. The company’s diversification also allows it to offer more products and expand into different markets. Once Google Search reaches market saturation, Alphabet can lean on other business segments, such as Intrinsic or Android, to reach new consumers and drive future sales growth, allowing it to avoid growth stagnation.
It should come as no surprise that Alphabet has a strong growth outlook. The company has a 97/100 Stock Rover growth score with projected revenue growth rates of 10.0% and 8.2% for 2022 and 2023, respectively.
Like other technology companies, GOOGL has experienced a rough 2022, with its share price falling by 39.7% over 12 months. GOOGL’s price movement is displayed below alongside a 50-day moving average.
Chart provided by Stock Rover.
However, Alphabet stock remains strong with an impressive 98/100 Stock Rover quality score. GOOGL stock has become a bargain for savvy investors, with its 17.6 (share) price-to-earnings (P/E) ratio and 18.8 (share) price-to-free cash flow (P/FCF) ratio falling below the S&P 500 average of 20.5 for both.
Overall, there are several compelling reasons why an investor might consider buying Google stock. The company has a robust financial performance, a diversified business model and a dominant market position, which should help to drive growth in the long term. While no investment is without risk, Google’s strong financials and long-term growth potential make it an attractive option for many investors.
A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $135.11, 52.8% higher than its latest closing price of $88.45, earning GOOGL a “STRONG BUY” recommendation from Stock Rover and a place among our three best long/short assets to buy now.
3 Best Long/Short Assets to Short Now: #2
Credit Suisse Group AG (NYSE: CS)
Credit Suisse Group AG (NYSE: CS) is a multinational financial services institution headquartered in Zurich, Switzerland. The company is one of the oldest and largest banks in the world, with roots dating back to 1856 and a market cap of $8.6 billion.
Credit Suisse has long been considered a giant in the finance industry. In 2021, the investment bank employed over 50,000 individuals across 150 offices in 50 countries to oversee its $1.8 trillion in assets under management (AUM). However, a series of unfortunate events and scandals have rocked the financial institution to its core and has even raised concerns about the bank’s long-term viability.
In 2021, as Credit Suisse’s Wall Street rivals enjoyed record low-interest rates, booming stock markets and a merger and acquisition frenzy, the bank was rocked by Archegos Capital Management’s $20 billion default. Archegos Capital Management, a hedge fund run by Bill Hwang, had borrowed heavily for years to make risky technology investments. Hwang’s risky plays had paid off for nearly a decade, allowing him to turn $200 million in 2013 into $20 billion by early 2021. As a result, banks were happy to lend Hwang and Archegos more and more money as they profited from the lofty fees charged for extending the loans.
Hwang’s investment strategy turned out to be untenable in the long run. When ViacomCBS and other technology stocks experienced significant sell-off pressure on March 26, 2021, Archegos could not meet its margin call requirements and was forced to default. Several banks, such as Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS), conducted fire sales of their Archegos loans, enabling them to avoid most of the damage. Credit Suisse, however, was caught holding much of the liabilities and suffered a $5.5 billion loss. The following days saw many of the bank’s top executives being fired or forced to resign result. While most other banks saw record profits in 2021, CS reported a $1.8 billion loss.
Credit Suisse’s troubles were far from over. The investment bank was found guilty by a Swiss Federal Criminal Court in June 2022 of money laundering for drug trafficking gangs from 2004 to 2008. The ruling spooked many clients concerned about the bank’s practices following the Archegos fallout. As a result, customers quickly began to lose confidence in the financial institution, and CS suffered an $88.3 billion capital outflow in the first few weeks of Q3 2022. Credit Suisse is projecting a $1.6 billion loss in Q4 2022 alone.
The fallout has forced the bank to seek a $4.2 billion equity raise as part of its restructuring plan. Credit Suisse has also announced plans to lay off 9,000 employees by 2025 and spin off its investment banking business, all as a direct result of its twin catastrophes.
CS has seen its share price plummet by 68.0% over the past 12 months, with little signs of stopping. The company’s share price is graphed below, along with a 50-day moving average.
Chart provided by Stock Rover.
Although it seems unlikely that Credit Suisse will go bankrupt, the investment bank’s troubles are far from over as it navigates the difficult path to recovery. CS, a once ambitious investment bank, has essentially “thrown in the towel” to being a major Wall Street player in the near future. Instead, the financial institution is shifting its business to focus on its more stable but much less profitable wealth management operation.
Credit Suisse, a financial legend, may rise again. However, with even industry titans such as Goldman Sachs and JP Morgan Chase (NYSE: JPM) announcing hiring freezes, bonus cuts and a drop in profits due to rising inflation and a slowing global economy, CS has a tough road ahead.
A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $4.90, 57.1% higher than its latest closing price of $3.12. However, CS receives a “HOLD” recommendation from Stock Rover and a place among our three best long/short assets to short now.
3 Best Long/Short Assets to Short Now: #1
Rocket Companies Inc (NYSE: RKT)
Rocket Companies Inc (NYSE: RKT), founded in 1985, is a Detroit, Michigan-based fintech company. RKT has a market cap of $850 million and is a conglomerate of 17 subsidiaries providing products and services across various industries, such as solar energy, advertising and personal finance.
Although Rocket Companies is, on paper, spread across diverse industries. Its business is almost entirely centered around loans (specifically mortgages). 87.3% of the company’s revenue is derived from interest income, loan servicing fees or the sale of mortgages. Mortgage sales account for 81.1% of RKT’s revenue alone.
Rocket Companies’ heavy reliance on loans means the company is heavily susceptible to market conditions and interest rates. RKT thrived in the record-low interest rate environment in the decade-and-a-half following the Great Recession. The post-COVID economic boom of 2020 and 2021 further fueled the company’s explosive growth. Rocket Companies saw its total revenue skyrocket from $5.1 billion in 2019 to $12.9 billion in 2021.
However, the music is likely ending for RKT as the United States economy slows and the Federal Reserve raises interest rates to combat inflation. Signs also point to an impending correction in the housing market as real estate sales have begun to drop.
All the above factors provide a bleak outlook for RKT. In order for Rocket Companies’ to sell mortgages or receive loan servicing fees, which account for 86.0% of total company revenue, they must issue new loans and mortgages. However, high-interest rates and a weak economy dissuade borrowing as consumers become increasingly less able or willing to make the higher interest payments demanded by lenders.
Future projections suggest RKT’s woes are just starting. Analysts do not expect the Federal Reserve to cut interest rates until at least late 2023, and 98% of CEOs predict a recession in the United States within the next 12 to 18 months.
Rocket Companies is forecast to see a 52.4% and 30.9% drop in revenue in 2022 and 2023, respectively. As a result, the company’s stock price has fallen by 52.5% over the last 12 months, shown below.
Chart provided by Stock Rover.
Like many corporations, Rocket Companies has pushed hard to brand itself as a technology company to gain favorable growth projections and valuation multiples. The company’s belief in the ability of the internet and apps to reach a more extensive customer base is intriguing.
However, at its heart, Rocket Companies is a mortgage and loan provider. The company generates profits from writing and selling mortgages and loans. No amount of technology can neutralize the adverse effects of an economic downturn and rising interest rates.
A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $7.29, 4.4% higher than its latest closing price of $6.98. However, RKT receives a “HOLD” recommendation from Stock Rover and a place among our three best long/short assets to short now.