This Wall Street darling may likely falter badly

As I have warned for couple of months, the overall market has presented plenty of warning signals that suggest there is a high likelihood that more pain for stocks will be coming. Of course, with 6 years relentless uptrend without any significant corrections, people are used to seeing stocks keeping going up. So even if a severe correction is underway, it won’t be a straight downturn. There are sufficient people out there who just want to buy at any weakness. But when the market finally cracks, those weak hands will be the first ones to run and shaken out. If you do want to buy, always think about what’s your exist strategy and better, to add some protection. One way of doing so is to short those stocks with ridiculously high valuation that cannot be supported by the fundamentals. Quite often, you can find such candidates from recent IPOs. These days, IPOs are generally greatly loved and their IPO prices are often bided up to the moon.  But eventually the reality will settle in and as soon as people find out that their stock prices at the perfection level cannot be supported by their business, they will dump them and hard! We have seen what happened to TWTR, which has been cut half since IPO and also SHAK, another 50% haircut. I find another good candidate to consider.

The company I’m talking about is Zoe’s Kitchen (ZOES). This is a pizza fast food company, which is called the Chipotle of its industry. It can prepare delicious pizza within minutes. Apparently it is very much loved by its customers and it deserves to have a rich valuation for its stock price. But can it in any way to justify a PE of 1200? In other words, investors have to wait for 1200 years to get back their money from its earnings. I bet no one can wait for that long!!! But regardless what I’m thinking, there are abundant people who simply love this stock and want to buy anyway. It has recently shot up to all time high around $45. However, this recent move did show some technical weakness. It is certainly overbought by any means and the upward moment has no momentum to support. It dropped to 40 recently but it is attempting to bounce back.  If it goes further up to $45, it becomes a bearish double top formation. I bet, if the overall market starts to falter, this kind of hype-stock will follow closely and likely more to the downside. I think it’s worthwhile to short ZOES around $45 as part of hedge to protect your portfolio.