by Jamie Dlugosch | October 17, 2011 7:57 am
Amid the market’s collapse in September, it was no surprise that short-selling stocks had reached a level not seen since March 2009. It was also a huge contrarian indicator to buy stocks.
Since short-selling stocks crested and the market hit a short-term bottom, stocks have rallied, with Europe getting more organized with respect to resolving its debt crisis. In addition, economic news has held up relatively well — or at least not shown signs of collapse.
Now earnings season is in full swing, and so far the news has been positive. Alcoa (NYSE:AA) missed estimates due to a sharp decline in aluminum prices during the third quarter, but the company was adamant that it would meet growth expectations for the remainder of the year. Late Thursday, Google (NASDAQ:GOOG) reported results that blew away revenue and profit estimates.
All the positivity is making investors downright giddy, and when stocks go up, traders that are covering their short positions can add fuel to market gains. The roller coaster ride continues.
However, individual stock fundamentals still matter, and the recent rally has lifted certain stocks that can’t justify their new lofty prices. Those companies with poor financials, weak management, or declining prospects deserve to be sold short. Here my top three candidates:
This poor company can’t catch a break — and it doesn’t deserve to. Research In Motion (NASDAQ:RIMM), the maker of the BlackBerry, was in the news again this week with word of a major outage in its service. While the incident wasn’t a regular occurrence, it couldn’t have come at a worse time. The company is already struggling to recover from poor management decisions over the last few years, and it doesn’t need any more negative publicity.
Its core product is losing market share. At the same time, the spotlight is back on Apple (NASDAQ:AAPL) with its launch of a new iPhone. Management needs to be focused on creating value with new products and innovation, not service outages.
Since the stock bottomed, shares of RIM have rallied nicely — they’re up more than 20% since the end of September. That is a rally you can sell into. The die-hard BlackBerry enthusiasts are fighting hard for the beloved device, but the writing is on the wall for this company. Its primary advantage of mobile email delivery on a handheld device has been usurped by the smartphone.
RIM isn’t that different than Eastman Kodak (NYSE:EK) in missing the evolution from film to digital. Kodak is further along in the death march, but Research In Motion will soon be at the same place. This is an easy stock to short and even more so with recent gains in share price.
Never forget that Netflix (NASDAQ:NFLX) is nothing more than a middleman. The company does nothing more than deliver content to the consumer. Its method of doing so helped crush the video store model, but it too is at risk of being crushed as home delivery via a less expensive method becomes reality.
The company is racing to make sure that doesn’t happen, but that hope is unrealistic. What is remarkable is that with the stock down nearly $200 from its peak, the shares are still expensive.
Recent attempts to prevent a collapse have failed. Management’s decision to split the company in two was derided by customers, commentators and investors and was then quickly abandoned. The focus is clearly on streaming home delivery, but difficulty in securing content at a reasonable price seems elusive.
The reality is that content providers deserve to get paid and the question is whether Netflix adds value in the process. It’s a good question. Even if you ignore these questions, the stock is expensive. Profit growth, while rapid, is slowing. Wall Street expects the company to make $4.48 a share in the current fiscal year. At current prices, the stock is trading at 26 times that number. That’s simply too much given the questions about maintaining growth. I would sell this stock short. I see $50 or below within 6 months.
Winnebago (NYSE:WGO), the maker of recreational vehicles, posted earnings on Thursday that included a warning that backlog of orders slipped 10%.
In response, the company is looking to cut prices in hopes of sparking more demand. I wouldn’t bet on it. The fall season for recreation vehicles is tough. At a minimum, look for Winnebago to struggle over the next two quarters.
The bias for Winnebago is negative and likely to stay that way. With the economy sputtering along, it is difficult to see prospects improving any time soon. I would sell this stock short.
As of this writing, Jamie Dlugosch did not own a position in any of the aforementioned stocks.
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