Anatomy of a Successful Short Sale

I get a lot of questions about short selling, probably because most investors have never done it.
Short selling is the sale of a stock that is not owned by the seller in anticipation that the stock’s price will decline, enabling it to be bought back at a lower price to make a profit. If you can identify stocks before they fall, you can make a bundle of money via short selling.
To help you understand the mechanics and opportunity of short selling, I want to walk you through my most recent successful short sale to help you decide if short selling is right for you.
On April 7 of this year, I sent out this alert to my Rational Bear subscribers, telling them to ‘short’ Conn’s, Inc. (CONN).
Conn’s is a large furniture and appliance retailer, but what’s unusual about it is the fact that it both sells furniture/appliances and loans its customers the money to buy its furniture/appliances. Sort of like General Motors and General Motors Acceptance Corporation (GMAC).
On the surface, Conn’s appeared to be growing quite well by selling an increasing number of products, but it was doing so by extending credit to just about any deadbeat that walked through its doors.
You and I may not need to borrow money to buy a washing machine or a color TV… but 80% of Conn’s customers do. Those are the kind of people I grew up with, and while they may be decent people, they are not the kind of people I’d want to loan money to.
That strategy started to backfire when the Conn’s finance division reported a massive $43.2 million quarterly loss. At the time, I said, ‘Those credit losses are going to get worse.’
How did I know that?

This post was published at Mauldin Economics on JUNE 21, 2016.