By Jacob Sonenshine
The latest market rally puts a number of stocks at risk of falling back down upon any disappointments. That doesn't have to be a problem; rather an opportunity to "short sell" some names.
Short selling means betting a stock will drop. The investor borrows someone else's shares, immediately sells them, and buys them back, hopefully at a lower price to create a profit, usually within a six month period.
That strategy looks interesting right now, with the S&P 500 up 12% from the late March bottom of its Iran-lead decline. The main driver: the price of oil has dropped from dangerously high peaks, as peace talks in the region have begun. Much of the rally is merited, especially if the Federal Reserve will keep interest rates stable, or maybe even cut a bit more, the economic expansion continues, and Big Tech keeps spending gobs of money on chip makers and manufacturers to build data centers.
But make no mistake. Plenty of stocks will see downside for a few related reasons.
First off, oil remains almost smack in the middle of its range from just before the Iran war to now, meaning the cost of energy is still higher. Some companies may fail to lift prices, causing a hit to gross profit margins and earnings.
Moreover, the economy is in the later stages of its economic expansion that's been happening for over five years. Potentially excessive investment in certain areas -- data centers and private credit are the two main suspects -- has accumulated. Those risks come as the economy is growing far slower than at the start of the expansion. If the Fed elects not to cut rates again because of inflation, economic growth could grind to a halt, and a recession could set in.
This type of environment tends not to bring about a super high number of rising stocks. Already, only 358 of the S&P 500's constituents are in the green for the past twelve months according to FactSet, while the index as a whole is up 34%. That's far less than the 435 that rose for the entire year of 2021, when the new expansion had gotten underway and the market was unconcerned about risks, according to Dow Jones market data.
So traders can find hundreds of stocks in the index, and more in other indexes, that will drop from here. That's especially true, as Chapter 11 bankruptcies rose 67% to 814 in February versus the same month in 2025, according to American Bankruptcy Institute.
Equity investors are noticing. "You're seeing a greater number of bankruptcies already," says George Schultze of Schultze Asset Management, which has a long/short equity strategy.
But short-sellers don't have to scour the graveyard for ideas. Plenty of stocks that simply look risky are ripe for shorting.
That's why Wolfe Research chief investment strategist Chris Senyek screened for some. One of screens shows stocks that are relatively expensive -- they are in the top quintile of price/earnings multiples -- and are in the top quintile of gross margin volatility. The latter means they don't consistently have enough pricing power to keep margins stable and are therefore vulnerable to earnings disappointments. This could knock their stocks lower, given that they're expensive.
The screen includes Tesla, Ford Motor, Carvana, DraftKings, Norwegian Cruise Line, GameStop, and Starbucks.
Another one of Senyek's screens lists companies with adjusted earnings per share at least 10% above GAAP EPS in at least eleven of the past twelve quarters. These firms are vulnerable to stock prices declines upon any disappointments in their demand outlooks or competitiveness. Any negative signal on that front would force the market to assume they may never reach true profitability.
The list includes Chewy, DoorDash, Wayfair, Etsy, Planet Fitness, Las Vegas Sands, and e.l.f. Beauty.
Take a chance on shorting some of these names.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 17, 2026 15:01 ET (19:01 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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