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.