Wednesday, 31 December 2008 23:00

The new year brings new, and possibly less competitive shorting opportunities

Happy New Year all! With the new year comes the possibility of a strong bear market rally, which brings with it the potential to profit from the same companies whose fundamentals and macro situation led them to be profitable short candidates in 2008. While I don't give trading advice, I do want my subscribers to be aware that a sharp increase in a weak company's share price does not necessarily make that company stronger. Keep in my mind the 12 months that I held on to my GGP bear trade. This company had several major price run ups that pushed the position into deep drawdowns, which enabled me to double up on the position without incurring significant option premiums and paying much less for short stock positions. I was able to do this because I had conviction and confidence in my research. If the research is followed consistently over an extended period of time, there should be enouch profit and confidence for the average follower to easily endure drawdowns and adverse market movements with confidence and aplomb! Remember, once you break 100% in net profits, you should be playing completely with the house's money!

I say this because I don't want the less experienced subscribers to mistake my fundamental valuation style for that of an active trader. I can't predict the future, but I am very good at analyzing the present. With those thoughts in mind, I wish you to remember that I believe 2009 will see quite a few company failures, starting with retailers in the first and second quarters as banks wait for the holiday revenues to finish being counted.

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On that note, we have finalized the Consumer Retail shortlist and identified five companies (of the original 16 shortlisted) as the most overpriced in fundamental terms, hence could see further correction in their share prices in the coming months. Below, you can find the companies that were culled from the shortlist (I removed the actual picks out of the list, and will start issuing reports on them within a week and a half for paying subscribers). I have highlighted some of the rejects in red in the table below, for they may be of interest to somebody. We performed a historical trend analysis of all the 16 companies intially shortlisted, cut down from over 500 found in the scan, and came up with 4 strong candidates. Unfortunately, two of them were very thinly traded with no underlying options, thus representing too much risk for my tastes. I am keeping them on the back burner as a speculative trade in the case of a major market move to the upside which should minimize my risk. The other two should have a forensic report ready for paying subscribers in a week or two. Keep in mind that we have not looked into any qualitative aspects in the shortlist below.

Revenue Growth (%)

Net Income Growth (%)

Operating Cash Flows

Current Price

Q108

Q208

Q308

Q108

Q208

Q308

Q108

Q208

Q308

Alaska Air Group

25.5

-1.6%

110.9%

-39.8%

-585.1%

-171.9%

-435.3%

34.4

104.1

141.0

Allegiant Travel

41.8

31.9%

-1.2%

-11.2%

102.7%

-72.6%

84.5%

43.8

29.7

26.4

AmeriGas Partners LP

28.0

34.5%

-46.8%

-1.8%

144.8%

-106.6%

132.7%

28.2

103.0

180.2

Children's Place

23.2

-40.3%

84.5%

-39.0%

-133.4%

0.1%

23.2%

(1.2)

143.1

111.1

Churchill Downs

37.2

-26.2%

172.8%

-44.5%

-112.1%

3821.3%

-91.6%

44.5

85.0

74.6

Costco Wholesale Corp

53.7

7.3%

-2.0%

39.0%

25.1%

-10.0%

34.8%

853.4

1,763.2

2,176.2

Omnicare Inc

22.1

0.1%

-0.6%

3.4%

-244.2%

22.9%

56.8%

142.3

228.6

331.9

O'Reily Automative

28.1

6.9%

9.0%

57.8%

14.1%

20.4%

-25.8%

118.9

215.5

289.3

Owens & Minor

37.6

0.2%

2.4%

0.9%

7.8%

-2.4%

7.0%

108.4

79.0

123.6

Walmart Stores

55.3

-11.3%

107.6%

-50.1%

-26.2%

114.1%

-51.5%

3,705.0

9,983.0

10,173.0

Wynn Resorts

44.3

9.5%

6.0%

-6.8%

-28.6%

482.2%

-81.2%

138.3

338.8

488.8

I am also preparing reports on more European banks and insurers. This is going to be a bad year for the UK and the Eurozone! Paying subscribers should have a lot of info and ideas to digest in the next few weeks.

Last modified on Wednesday, 31 December 2008 23:00

5 comments

  • Comment Link timobrien Friday, 02 January 2009 12:04 posted by timobrien

    I agree whole heartedly, thanks for the response.

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  • Comment Link Reggie Middleton Friday, 02 January 2009 11:09 posted by Reggie Middleton

    Ackman could very well just be trying to guarantee a seat at the bankruptcy breakup table, or putting his dibs on the contingent upside with the equivalent of low cost call options. He has not committed that much capital. The companies inventory is worth more than the share price reflects, the only caveat is that the company has more than it's inventory to contend with. The share prices is depressed due to the contingent liability of bankruptcy and the bad financing environment which makes bankruptcy and litigation a very real threat.

    That is why it is better to cherry pick prime assets at fire sale prices than to try and speculate on the company as a whole.

    Report
  • Comment Link timobrien Friday, 02 January 2009 10:54 posted by timobrien

    Your discussion begs the question as to whether GGP is now a good long? While ultimately it is a call on whether GGP can roll over their debt, which seems difficult in this environment, Ackman seems to think they will, otherwise why else would he buy it? Just curious.

    hope you had a good new year.

    Report
  • Comment Link Reggie Middleton Friday, 02 January 2009 10:50 posted by Reggie Middleton

    I never said the market will do well, I simply acknowledge that there is a strong chance of a bear market rally, which has actually been in effect since late November. Rising prices over a period of a few months does not mean the market is doing well. As a matter of fact, if we can be assured that these aggressive bear market rallies were only a few months in duration, the short lists are all that more valuable. Anybody who follows my research should have a much longer time horizon than a few months. With today's volatility and wack pricing, it can take that long just to obtain a favorable position.

    Trust me, when I feel it is time to start wading into the long waters, I will let all subscribers know. Just be aware that I don't look for bottoms, and it is a strong chance that the next big opportunity will probably not be in the rapid capital appreciation of equities, which will probably wander laterally for quite some time even when they hit bottom.

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  • Comment Link Jeff Kirkham Friday, 02 January 2009 10:08 posted by Jeff Kirkham

    Reggie,
    It is good to see acknowledgement (from you) that the over all market may do well in the first few months of the year. To be honest this has been one of the the things preventing me from becoming a paid subscriber. I could not see the value in paying for a list of short candidates while being confident that we will see a brief bear market rally.

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