Picture this.
You’ve just identified a stock with deteriorating fundamentals. You want to short it, but you’re concerned about how changes in the macro economy might affect your position.
What do you do?
“I’d stay away from mainline economy companies that have a high correlation to growth slowing to the downside, or accelerating on the upside. Unless, of course, you’ve got a bulletproof catalyst,” says Hedgeye CEO Keith McCullough in the video above from a discussion with Healthcare analyst Andrew Freedman on The Macro Show today.
Oh, and never start with a stock’s valuation, McCullough says.
Freedman and McCullough discuss a favorite long of our Healthcare team, athenahealth (ATHN). Year-to-date the stock is up 8%. And at 46 times next twelve month consensus earnings estimates, the stock is far from cheap, even if Wall Street’s predictions are way off.
But valuation isn’t a catalyst, the fundamentals of its business are.
“For something like Athena, valuation doesn’t scare you,” McCullough says. “If there’s going to be an acceleration in Athena’s business you say, ‘Ok, it’s expensive but not many companies can grow this fast so it should get more expensive.”