ABM – the first Short Sell Candidate

Today I am introducing a stock that is a potential short sell candidate.

But first… what is short selling of a stock?

I will cover short selling in detail in a later email, but for now here’s how it works in a nutshell:

Select a stock that looks as if it goes into a price downtrend
Borrow and sell this stock
When the price has dropped, buy it back and return it to its original owner
The difference between selling and buying back is your profit (minus fees)

Here’s how such a trade ideally looks like in a chart:

Short selling is often assumed to be a very high-risk technique – I disagree, but it is correct that as a trader you need to know what you are doing when selling short. Setting a proper stop to protect your capital is an absolute must.

ABM Industries

That’s the company I have looked into. They are providing “facility solutions”, which is a fancy way of saying “janitors and park house services”. They do more, but their key segments are all about that.

They have 130,000 employees and a revenue of $5.1 Billion. The picture below gives you the whole idea:

I actually like this company. They are old – founded in 1909. But they have made money over the last 108 years by sticking to their core business idea – cleaning things up for others for a fee.

It’s a very traditional industry (not exactly high-tech), but what I like about them is how they constantly adjusted to changes in business environments. Many older companies still did not pick up on Internet marketing, social media etc.

But ABM even has a Facebook page, and they use it effectively – frequently praising their employees for jobs well done. That’s really nice.

So why short selling them?

Well… there are a couple of indicators that support this idea.

1) Finances

They have been growing their revenue, but profits have been shrinking and they barely make money.

2) No Stock Price Increase in a Bull Market

2017 has been a great year for stocks. Prices have been shooting up, with few exceptions.

But the ABM stock price has stayed within a set price range throughout the entire year.

3) Several Downtrend Indicators at the same time

This stock shows several flags that indicate a possible new downtrend.

Explanations about indicators aside, here are the key flags that often show before a price downtrend starts:

No new higher price peaks – indicating weakness in demand
Negative cross-over between long-term and short-term trend lines. That’s a classic downtrend indicator
Multiple indicator curves show the opposite trend of what the stock price curve is doing, i.e. they show a downtrend

For the experts, the indicator curves are MACD, ROC and RSI.

Don’t worry if you have never heard about them. For now just keep in mind that there are several downtrend indicators happening, all at the same time.

How to make this trade

If you are into short selling, here’s how that would work:

Decide on your maximum risk: If you have a $100,000 portfolio, don’t risk more than 1%, i.e. $1,000.
Decide on your stop price: I would choose $44. If the stock price goes above that price, buy it back and get out of the trade at a small loss.
Calculate your stop loss distance: It’s the stop price minus the short-sell price, so $44 – $41 = $3.
Calculate number of stocks to short: $1000 / $3 = 333 stocks.

Note: you will need a margin account to short sell. If you don’t know what that is… then don’t sell short (for now).

A word on market trends

Nothing much happened during the last week. Below the current market sector trends and week-on-week changes.