3 Stocks to Short With Fresh Red Flags

Last week was a rough one for technology stocks, with the sector standing out as the market’s clear laggard. 

The pain was particularly acute among more speculative growth names — the kinds of stocks where investors are often betting on what a business could become years down the line.

That sort of setup can be dangerous. When sentiment turns, lofty expectations suddenly matter a lot less than cash flow, balance-sheet strength, and whether the underlying business is actually delivering.

And that can create an interesting setup for short sellers. A falling stock isn’t automatically a bargain, especially when weak price action is backed up by poor fundamentals, mounting losses, or fresh financing concerns.

Separating temporary weakness from stocks with deeper problems takes time. Fortunately, there’s a way to narrow the field…

Stocks to Short Strategy

Our in-house quant system takes a look at 4,600 stocks each day and grades them through the lens of 115 metrics, split across 7 categories. That data is boiled down into a simple, straightforward metric — a stock’s Zen Rating.

Our top grade, a Zen Rating of A, equivalent to a Strong Buy recommendation, is reserved for those tickers that rank in the top 5% on overall fundamental strength. At the opposite end of the spectrum, the stocks that rank in the bottom 5% receive a Zen Rating of F, equivalent to a Strong Sell recommendation.

That leaves more than 200 tickers to consider on any given day. That’s not the end of it, however — you can speed things along by taking a look at one of our exclusive Zen Strategies.

Each strategy is a portfolio consisting of just 7 stocks. There are 11 portfolios in total, covering everything from Growth and Value to AI and Income. This week, however, we’re focusing on the other side of the trade with our Stocks to Short Strategy.

Within the last month, this portfolio has netted a 9.35% return, blowing the S&P 500’s 0.12% gain in the same timeframe out of the water.

Without further ado, let’s take a closer look at 3 interesting tickers from the portfolio…

Cipher Digital (CIFR)

Cipher Digital develops and operates large-scale data centers. The company built its business around Bitcoin mining, but has increasingly turned its attention toward infrastructure for artificial intelligence and high-performance computing. CIFR currently ranks at the very bottom of everything we track, giving it a Zen Rating of F — and it’s also the lowest-rated stock in the D-rated Information Technology Service industry.

Even CIFR’s strongest Component Grade leaves plenty to be desired. Momentum ranks in the bottom 15% of the stocks we track, followed by Sentiment at the bottom 10% and Growth at the bottom 9%. Artificial Intelligence comes in at the bottom 6%, while Value falls to the bottom 4%. A beta of 2.52 certainly doesn’t help Safety, which ranks in the bottom 2%. Financials is weaker still — there, CIFR sits in the bottom 1% of everything we track.

There’s also fresh financing risk to consider. Cipher recently issued $850 million in convertible notes, while a concurrent transaction will exchange roughly $166 million of existing notes for more than 40 million shares of common stock. The capital is intended to help fund the company’s expansion, but it also adds dilution concerns to a business that already carries a debt-to-equity ratio above 12 and generated negative operating cash flow over the past year.

CIFR has now missed earnings estimates in 3 consecutive quarters. Shares have also fallen by more than 30% over the past week — and with fundamentals this weak, there’s a strong case to be made for further deterioration.

Serve Robotics (SERV)

Serve Robotics develops autonomous delivery robots for short-distance deliveries in urban areas. The company has been rapidly expanding its fleet and geographic reach, but SERV currently ranks in the bottom 1% of all the stocks we track, giving it a Zen Rating of F — and it’s also the lowest-rated stock in the D-rated Logistics industry.

Growth is actually the strongest part of the profile, yet even there, SERV ranks in the bottom 20%. Artificial Intelligence comes in at the bottom 5%, followed by Sentiment and Momentum at roughly the bottom 3%. Things only get worse from there. Value and Financials both rank in the bottom 2%, while a beta of 2.64 helps put Safety in the bottom 1% of everything we track.

The valuation is particularly difficult to square with the current economics. Serve trades at almost 68 times sales, despite generating just $7.8 million in revenue over the past year. More importantly, the company’s October investor presentation calls for only $9 million to $10 million in full-year revenue, against $44 million to $48 million in cost of revenue — before another $140 million to $150 million in projected non-GAAP operating expenses.

Serve has also missed earnings estimates in each of its last 2 reports, while shares have dropped by roughly a quarter in the past week. There’s certainly a compelling long-term story behind autonomous delivery, but right now, the gap between that story and the underlying economics remains enormous.

CleanSpark (CLSK)

CleanSpark operates large-scale Bitcoin mining and data-center infrastructure, and like Cipher, the company is now investing heavily in artificial intelligence and high-performance computing. CLSK ranks in the bottom 1% of everything we track, giving it a Zen Rating of F — and it’s also the lowest-rated stock in the F-rated Capital Markets industry.

Artificial Intelligence is the only Component Grade that avoids a D or F, and even there, CleanSpark ranks in just the bottom 30% of the market. Momentum comes in at the bottom 14%, followed by Safety at the bottom 9% and Growth at the bottom 7%. Financials rank in the bottom 6%, Value in the bottom 5%, and Sentiment rounds things out at the bottom 2% of everything we track.

The latest results do little to improve the picture. Quarterly revenue fell 30.5% year over year, while CleanSpark recorded a $239.8 million net loss. Operating cash flow over the past year stands at negative $529 million, and the company has now missed earnings estimates in 3 consecutive quarters.

At the same time, CleanSpark recently closed $2.276 billion in senior secured notes carrying a 7.875% interest rate to help fund its Sandersville data-center expansion. There is a bullish counterpoint here — that investment is tied to a major lease agreement and the company’s push into AI infrastructure. But the sheer amount of capital involved puts considerable weight on successful execution, particularly for a business already producing substantial losses. Shares are already down roughly 20% over the past week.

Interested In More Great Stock Picks?

The 3 stocks highlighted above are just a fraction of what you get from our proven Stocks to Short Strategy.

That’s because each day our system recalibrates — and Zen Strategies members get access to the top 7 stocks to short based on 115 different parameters that point to underperformance. 

See all Top 7 Stocks to Short here >

However, maybe short selling isn’t your cup of tea. Perhaps you would like to see all 11 of our market-beating strategies including Growth, Momentum, Value, and our coveted AI Factor model.

Each featuring the top 7 stocks.

Each featuring tremendous performance.

We spell it all out in this timely presentation below that lives up to its name:

10 Minutes a Month to Beat the Market >

What to Do Next?

• 77 Best Stocks NOW! >
• Options Trading with the Zen Ratings >
• 2 New Stocks to Buy from Steve Reitmeister >

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