This guy likes AFFX short, too.
Note-This article is 5 days old.
John Dorfman
Commentary. John Dorfman, president of Dorfman Investments in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or its clients may own or trade investments discussed in this column.
05/15 12:58
Three Short-Sale Ideas for Higher-Risk Investors: John Dorfman
By John Dorfman
Boston, May 15 (Bloomberg) -- Most money managers don't talk much about their bets on stocks falling.
There are lots of reasons for their reticence. Some people consider ``short selling'' a nasty practice, almost un-American. The company whose stock you sold short probably won't talk to you next time you call. And traders may orchestrate a ``short squeeze,'' a maneuver designed to make short sellers unwind their positions at a loss.
I think an open dialogue about shorts is healthy, though. It's a dangerous technique because you can lose more in a trade than you initially invest, but it merits consideration by sophisticated investors, especially in today's expensive market.
Granted, stocks aren't priced as high as a few months ago. Still, the Standard & Poor's 500 stock index trades at 28 times earnings and yields only 1.26 percent in dividends. That means this market still looks at least as expensive as those of 1929, 1962, 1973 and 1987, previous valuation peaks.
If you possess a deep enough pocketbook to consider selling short, guts and a clear understanding of what you are getting into, here are three stocks to consider. I'm already betting two of them will fall and am thinking about making a similar bet on the third.
Starbucks
Starbucks Corp., based in Seattle, Washington, is a chain of some 2,800 gourmet coffeehouses in the U.S. and 15 other countries. Most people I know find the coffee pretty good and the ambiance of the coffeehouses pleasant. Nevertheless, I am short the stock.
Starbucks stock has been on the expensive side ever since it came public in 1992. During the past six years, the average price earnings ratio has been 56. Today it's 49. So it is no more expensive than usual.
But business is not running as usual for Starbucks. First, the cost of electricity is going up, especially on the West Coast. Starbucks has a lot of shops that stay open late, burning a lot of electricity.
Second, the U.S. is in an economic slowdown. While many yuppies will keep guzzling gourmet coffee, some will trade down to cheaper places such as Dunkin Donuts. Already, same-store sales growth at Starbucks has slowed to 6 percent in the latest quarter compared with 10 percent a year ago.
Third, McDonald's Corp. two weeks ago opened the first U.S. outlet for McCafe coffeehouses. These are a far cry from the traditional McDonald's. They feature leather armchairs and lace curtains, and the food is served on china. While Starbucks may beat back the incipient challenge, the effort could be costly for all sides.
Affymetrix
Affymetrix Inc., with headquarters in Santa Clara, California, makes equipment used to analyze genetic material. While I don't presume to be expert on the technology, as far as I can tell genetic scientists respect its products, including slides containing DNA sequences, probes, scanners and software.
I mentioned Affymetrix as a potential short sale in this column at the end of January. The stock then sold for about $68 a share. I sold it short in several client accounts in early February at about $65. Today it trades for $29.99.
Normally, I'd be satisfied with a gain of more than 50 percent on the short sale of a quality company. This stock, though, still has attributes that suggest a further decline.
Affymetrix shares fetch 168 times estimated earnings for 2001, which are about 18 cents a share. Analysts expect earnings to grow about 40 percent a year over the next five years. But the price already seems to reflect that assumed growth rate. If it's slower, watch out.
The current stock price is 11 times book value (corporate net worth per share) and close to eight times revenue. Debt, as of Dec. 31, was two-and-a-half times stockholders' equity. And the company's loss in the first quarter was about 11 cents a share, worse than analysts' expectation of a 7-cent loss.
Triton PCS Holdings
Triton PCS Holdings Inc., based in Berwyn, Pennsylvania, provides cellular telephone service in several Southeastern states. It operates under the brand name SunCom and is part of the AT&T Wireless Network.
Triton's financial results have improved of late. Its first- quarter loss narrowed to 71 cents per share compared to a 75-cent loss in the same quarter a year ago. Revenue grew 80 percent to $113 million.
My feeling, however, is that the good news is insufficient to justify Triton's lofty stock price. At $33.50 a share, Triton stock commands a multiple of 38 times book value and 5 times revenue. Furthermore, Triton's total debt is more than 13 times stockholders' equity.
Analysts adore the stock. Of the 14 opinions in the Bloomberg recommendation database, all 14 are either ``buy'' or ``strong buy.'' Perhaps this should give me pause. But I have found that when analysts are unanimous about a stock (positively or negatively) they are frequently wrong.
I've always been uncomfortable with the valuation metrics for cellular phone companies. They often seem to trade based on the size of the customer base or on cash flow (real or projected), rather than on the present value of future earnings.
My critics would say I'm applying dinosaur valuation methods to a new generation of stocks. They may be right. Then again, they said the same thing about valuation of Internet stocks before those high fliers plunged 90 percent.
I haven't yet sold Triton PCS short, but I may in the near future.
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