Mad2.
I like that, stuckholders.
Here's an interesting article from Business Week. How come these big readership magazines never quote anyone you ever heard of? There's one guy quoted in this though that seems to know his sheet...
businessweek.com@@B*FYcmcQYh6YWgcA/premium/00_52/b3713058.htm
WHERE TO INVEST -- STRATEGIES FOR STOCKS
It's Boom Time for the Shorts
Short sellers are ahead for the first time since '94
More than a few people made a killing earlier this year by
selling Internet stocks short. And with many other stocks
heading south these days, the tactic of
short-selling--borrowing shares, then selling them in the
hopes of buying them back later at a lower price--is fast
coming back into vogue after half a decade in the
wilderness.
The year 2000 was certainly far kinder to short sellers than
it was to bull-market riders. According to Harry Strunk, an
investment consultant in Palm Beach, Fla., who tracks
professional short-only money managers, this is the first
year that shorts have reaped positive returns since 1994.
They were ahead 6% in October, and Strunk expects that figure to be a lot higher
when November results are toted up.
Making money by selling short isn't complicated--it's just reversing the sequence of
buy low, sell high. Perfect for a bear market, right? Not necessarily. Shorting is an
extremely risky business, with a potential for loss that is theoretically unlimited.
And it can get even riskier as more players decide to bet on declines. If stock
prices turn up, for example, people who have shorted stocks can sometimes panic
and all try to buy back shares at the same time. That can make closing out a short
position and limiting your losses extremely tough to do--and the higher the prices
rise, the more money you lose. ''Liquidity is one of the biggest risks of shorting,''
says Sean McDaniel, a portfolio manager at EMX Investments, a Dallas hedge
fund. But if done properly, he adds, short-selling can provide opportunities in any
market.
The technology sector has already taken a beating this year. But that doesn't mean
there aren't still good ideas for short sellers. One way to find them: Look for
companies that might be forced to lower prices on their products, which could
clobber both revenues and earnings. One such prospect is SanDisk Corp. (SNDK),
which makes ''flash'' data-storage cards for cameras and audio products. Because
of overcapacity in semiconductors, says a hedge-fund manager who asked not to
be named, the cost of flash memory could drop by 50% in the next few quarters.
SanDisk, he believes, will be forced to sell its products for less as competitors cut
their prices--and will thus fail to meet revenue projections.
Not surprisingly, SanDisk disagrees. ''We don't expect a 50% decline in the next
two quarters,'' says CEO Eli Harari. ''We have very substantial cost reductions
coming ahead, but we are able to reduce manufacturing costs at the same time, so
we can maintain our earnings and grow the market.'' Still, the pessimistic fund
manager is looking for SanDisk's share price, currently $68, to halve in the next six
months. He figures the market will slash SanDisk's 50 price-earnings ratio if it
senses that sales are stumbling.
Another way to evaluate short potential from p-e's is to judge whether a company's
ratio is justified by how its products stack up against those of rivals. Steve
Worthington, a portfolio manager at Barbary Coast Capital Management, a San
Francisco hedge fund, thinks programs offered by Manugistics (MANU), a
developer of software for supply-chain management, don't measure up to the
competition's. ''I2 Technologies is clearly the leader in this field,'' he says. Yet
Manugistics' stock, now around 100, is trading at a price-earnings ratio of 478. By
contrast, Wall Street expects I2's earnings to grow 30% faster than
Manugistics'--yet its stock, at 57, has a p-e ratio of 249. His conclusion:
Manugistics shares are in for a 50% correction.
Another outfit with a stratospheric valuation is Research in Motion Ltd. (RIMM), a
Canadian company that makes the BlackBerry, a handheld wireless e-mail device
that has been a hot seller. RIM's profits are forecast to grow 80% a year--but its
p-e ratio is a staggering 13,600. With cell-phone makers such as Motorola now
targeting RIM's market, Worthington thinks RIM shares are way overpriced. ''It
has a $10 billion market cap with only $175 million in revenues,'' he says. ''This
company is a day-trading fool's special.''
What about short-selling ideas in nontech industries? A good rule of thumb: Look
for earnings that don't reflect steady cash flow from an ongoing business. For
instance, Sunrise Assisted Living Inc. (SNRZ), which provides services to the
elderly, has increased earnings through a novel strategy: selling off its most
profitable facilities to a partnership in which it holds a 25% stake, and reporting
these one-time gains as net income. Worthington argues that this practice makes
the quality of its cash flow suspect. Sunrise execs say the company has enough
properties to sell for some time to come.
FALTERING. Faulty business strategies can also cause future blowups.
Multilevel marketing schemes, which increase sales by continuously hiring more
salespeople who must recruit other salespeople, can sometimes lead to disaster
when the addition of new salespeople falters. One such company to keep an eye
on is PrePaid Legal Services Inc. (PPD), which markets legal services for a
monthly fee through a multilevel network of 234,000 sales associates. Its revenues
grew 30% last year. But in the third quarter, the increase in new sales associates
slowed to 23%, down from 42% a year ago--a sign that PrePaid may not be able
to sustain its rate of revenue growth. Company execs explain that this year's
decline is due to tough comparisons following a major sales-recruiting drive in
Canada in 1999.
Short sellers also say PrePaid is not making adequate reserves against uncollectible
commissions. The shorts note that 64% of the company's assets are prepaid
commissions, which aren't likely to be recoverable if an employee quits. While
commission advances have increased 160% since March, 1998, reserve for bad
debts as a percentage of advanced commissions has declined by half, to a mere
2.8%, which some fund managers feel doesn't adequately protect its balance sheet
from a slowdown. Randy Harp, PrePaid's chief operating officer, says the
company monitors its advances to individual sales associates quarterly and has
determined that the reserve is sufficient.
SCOOT. Retailing is facing lots of woes. One item in huge oversupply is scooters,
which have plunged in price this year. An interesting short-seller strategy is to look
at outfits that sell a lot of scooters--such as Sharper Image (SHRP), Children's
Place (PLCE), and bicycle distributor Huffy (HUF). As one hedge-fund manager
sees it, all three may be vulnerable to sales declines.
And problems at Children's Place, a leading seller of children's clothing, aren't
limited to scooters. Sales growth has eased in the most recent quarter, to 41%
from 52% a year ago, and short sellers note that the average time required to
collect accounts receivable increased more than 50%. Seth Udasin, chief financial
officer for Children's Place, says that growth is still strong and he's not concerned
about accounts receivable, since those payments are coming chiefly from landlord
rebates and credit-card users.
While falling stock prices seem to be the norm these days, picking the right stock to
sell short can entail difficult analysis--and great risks of being wrong. But
professional short sellers couldn't be more delighted. After five years of slim
pickings, they finally have the kind of rocky market they need to rack up some fat
rewards.
By DEBRA SPARKS
KJC <wink> |
