Whether you’re looking to prune your portfolio of losers, or going more aggressive by hunting down stocks to short (via options or just outright), you’re typically looking for the same attributes.
For instance, are any of your holdings vulnerable to disruption? Does Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) have some new product in the works that threatens your stock? Amazon.com, Inc. (NASDAQ:AMZN) is always experimenting; does its latest offering have one of your stocks in its crosshairs?
You also want to consider whether any of the stocks you hold are riding some sort of fad, whether it’s a newer niche technology, or something as old but fickle as teen retail.
Amid all this, you want to look for the hallmarks of a company in trouble — weak financials, low cash on hand and deteriorating fundamentals.
You should always monitor your holdings for weakness, but especially in an overbought market like this, I encourage investors to consider finding stocks to short, as well. Briefly put, shorting a stock allows you to make money when it falls, and while it’s a higher-risk maneuver, you can improve your odds by targeting clear failures in action.
Right now, I have a list of five stocks to either short or at least rid from your portfolio. In no particular order, here are some crumbling picks:
Stocks to Short: Abercrombie & Fitch (ANF)
The U.S. millennial generation is massive at more than 75 million people. But many retailers have had enormous difficulties selling to this group, and that includes Abercrombie & Fitch Co. (NYSE:ANF).
Abercrombie has been trying to come up with interesting concepts, but the results have been flat. Part of the problem is that the ANF brand is outmoded, ceding ground to operator like Zara, H&M and Forever 21.
No surprise, then, that Abercrombie’s financials are awful. In the latest quarter, ANF reported a net loss of $13.1 million and same-store sales dropped a grueling 4%. InvestorPlace.com’s Dan Burrows put it in stark terms:
“Abercrombie & Fitch has been a nice trading vehicle for speculators, but as an investment, it’s trash.”
Even Abercrombie says the rest of the year will remain “challenging.”
The reality of the retail business — especially those companies that focus on teens — is that once you fall out of favor, it’s difficult to return to prominence. Just look at the retail graveyard, recently filled with names such as Aeropostale Inc (OTCMKTS:AROPQ), The Wet Seal, Quiksilver and American Apparel.
ANF shares are off 80% since 2011 and 40% year-to-date … and they still have plenty of downside in them. Likely to zero.
Stocks to Short: BlackBerry Ltd (BBRY)
BlackBerry Ltd’s (NASDAQ:BBRY) implosion has been simply breathtaking. Back in 2011, the company shipped about 52.3 million handsets. But as of this year, BBRY will do about 2 million, representing less than 1% of the global market.
BBRY shares are off 90% since 2011, and yet those looking for stocks to short still can hit paydirt in BlackBerry.
Because its new handset strategy is doomed to fail, too.
BlackBerry will now outsource its handset production while continuing its transition into a software and services company. While this might create higher margins, traction still will be difficult to come by. In the past, BlackBerry had the advantage of tailoring the software to its own platforms. But now, when a customer is deciding on a device, BlackBerry will be just another vendor.
Meanwhile, BlackBerry faces stiff competition with the resources to invest heavily in their own solutions. Notable players include VMware Inc. (NYSE:VMW), Microsoft Corporation (NASDAQ:MSFT), Citrix Systems, Inc. (NASDAQ:CTXS), SAP SE (ADR) (NYSE:SAP) and International Business Machines Corp. (NYSE:IBM).
In short, BlackBerry is a weak company that shifted from one fiercely competitive market to another.
That’s great news for short sellers.
Stocks to Short: SeaWorld Entertainment (SEAS)
Changing a brand is risky — doubly so for a brand that has been around for decades.
That’s what SeaWorld Entertainment Inc (NYSE:SEAS) has been dealing with, though, and unfortunately, nothing seems to be working.
SEAS has built its business on live entertainment, involving killer whales. But a damaging documentary alleging mistreatment of the animals has put its core business at risk. SeaWorld will no longer breed killer whales as a result, and interestingly, the company now plans to use virtual reality (VR) technologies for its entertainment, among other shifts.
Customers already have too many choices, including parks from Six Flags Entertainment Corp (NYSE:SIX) and Walt Disney Co (NYSE:DIS). They’re investing in VR and also have numerous other attractions that stand out from SeaWorld.
SeaWorld simply no longer has what set it apart.
Attendance plunged 7.6% to 5.98 million during the latest quarter (in fairness, a part of this was blamed on the terrorist attack in Orlando, Florida, too). The company also reduced its full-year adjusted EBITDA forecast to $310 million to $340 million, down from the previous guidance of $335 million to $365.
But perhaps the most troubling sign is that SEAS eliminated its dividend. This will help preserve SeaWorld’s cash position and help the company invest in new growth outlets. But an axed dividend is typically a big, red flag, and shouldn’t be ignored.
Stocks to Short: Box Inc (BOX)
Box Inc (NYSE:BOX) shares have flown 65% higher since June, driven by upbeat reports from Wall Street analysts, as well as some buyout buzz.
All this is setting BOX up for a short.
Box’s core technology — allowing for routine functions like storing and sharing documents — is all but commoditized at this point. Amazon, Microsoft, Alphabet and more offer similar solutions — and can offer much lower prices, subsidized by other higher-margin businesses.
Growth has continued to decelerate, too, which is an ominous sign. For instance, the latest quarter’s revenue growth stood at 30% year-over-year, versus 43% during the same period in 2015.
But perhaps most worrisome is Box’s hefty losses. For the year, the company forecasts a loss of 67 cents to 69 cents a share. In fact, Box has not posted a profit in the past 11 years.
Short sellers are betting with their wallets. Short positions in BOX stock are a sizable 17% of the overall float right now.
Stocks to Short: Gogo Inc (GOGO)
Gogo Inc (NASDAQ:GOGO) is the leader in providing in-flight Internet services. The company’s platform is on roughly 9,600 aircraft, accounting for about 20% of the world market share. Because of the scale, GOGO has been able to invest heavily in R&D to add more features such as access to Netflix, Inc. (NASDAQ:NFLX).
However, Gogo faces one nagging problem: The core infrastructure was launched back in 2006, which was before the Apple Inc. (NASDAQ:AAPL) iPhone hit the market. This means GOGO’s system provides passengers with Internet connection speeds of only about 10 megabits a second.
Yes, Gogo will upgrade the platform to 100 MBS performance, but that won’t hit until 2018. In the meantime, Gogo’s competitors — including ViaSat, Inc. (NASDAQ:VSAT), Panasonic and Global Eagle Entertainment — are capitalizing on this. For instance, one of GOGO’s major customers, American Airlines Group Inc (NASDAQ:AAL), recently signed a deal with ViaSat for some of its newer aircraft.
This does not imply that somehow the company will soon lose a tremendous amount of business. Rather, the key risk is pressure on pricing, and thus margins. Also, GOGO has a heavy debt load of $886.9 million. So as the company invests in its infrastructure, it might need to issue more stock, diluting shareholders.
Gogo’s situation doesn’t look dire, but it doesn’t look good, either.
Tom Taulli runs the InvestorPlace blog IPO Playbook and also OptionExercise.com, which provides interactive tools and financial services for those who have employee stock options (pre- and post-IPO). Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.