Selling short, an adventure in risk: make money picking the worst stocks.

April showers bring May flowers. Right! Well, how'd you like to make money by betting that the rains won't come and the buds won't bloom.

In most parts of the world, to sell something short is to underestimate its value. However, in the financial community, to "sell short" is to bet that a particular stock is overvalued and that its price will decline.

Here's how the strategy works. Your bet is that the price of the stock will drop, so you borrow shares of that stock from your broker and immediately sell them. Next, you wait for your prediction to come true. If you're right and the stock price does decline, you buy back the shares at the lower price and return them to your broker.

For example, pharmaceutical company X is about to market a new miracle drug. You borrow five shares of the stock, which are trading at $100 each. You sell those five shares and receive $500. Now, suppose the Federal Drug Administration turns down the drug for distribution. In most cases, investors, now having lost their incentive to buy, will begin selling or dumping the stock.

That's when you make your move. When the stock declines to $50, you reenter the market and buy the shares at the lower price. You then repay your broker with the devalued stock and keep $250 in cash.

If this sounds too simple to be true, it is. First, you have to be right on the bet. Given the mountains of research available on individual stocks, it's easy to identify a statistically overvalued company. It's not so easy to identify companies that are fundamentally weak.

Second, unless you're dealing with a discount broker, you can rarely buy five shares of stock (an odd lot) without paying higher brokerage fees. Full-service brokers usually buy and sell in lots or baskets of 100 shares (round lots).

Third, whether you pay more for the odd lot or less for the round lot, you will have to pay the broker for each transaction. Those fees will ultimately eat away at your profit.

Because of the highly speculative nature of the sell-short strategy, investors with a low level of risk, tolerance should avoid using it. If you guess wrong, and the stock price goes up, say to $800, you will have to buy the stock back at a price higher than when you sold it. In this case, you'll end up paying $300 in order to fulfill your obligation to return the borrowed shares to the broker. That's $300 plus fees on each part of the transaction that you have to pay out-of-pocket.

Once again, due to the inherent risk in selling short, only a sophisticated investor with deep pockets should consider using this strategy. However, skittish investors can still use selling short as a kind of divining rod to some lucrative investments.

Such newspapers as Investor's Business Daily or Barron's track short sales in two ways. They list the total number of short sales as reported by the various stock exchanges. They also report who is doing the short selling--specialists or average investors. Specialists work for individual brokerage houses and trade for their firms' own accounts. This breakdown is a barometric indicator that tells whether it's the insiders or the individuals who are doing the short selling.

But even the insiders can make mistakes, and following them blindly could cost you big. However, there is a way to use the sell-short strategy and reduce the risk to your investment. As part of your diversified portfolio, you could include stock mutual funds that sell short.

Here are some examples of popular funds that sell short:

Rydex Ursa (800-820-0888) was started in January 1994. It holds a 100% short position in stocks that make up the S&P 500. In June 1993, Robertson Stephens tapped Paul Stephens to be the manager of its aptly named Contrarian Fund (800-766-3863). The Contrarian management allows for a maximum of 25% of its portfolio to be in short sales. Dreyfus Strategic Growth (800-645-6561) is another fund that sells short, but on a smaller scale. Dreyfus (See "BE Mutual Fund News," October 1994), which has had a five-year 5.39% total return, can short up to 25% of its portfolio.

Funds such as these will allow you to play the short-sell strategy, but reduce your risk because they are diversified and managed by industry insiders.