It can be tough to go short stocks in a stock market that has been surging. However, it can occasionally be a wise move to have a few shorts, especially if you have a portfolio dominated by long positions. One stock that appears headed lower is AT&T (T). Below are three reasons why investors should considering going short.
Reason No. 1 - Technicals
AT&T has had a solid past 52 weeks of returns for its investors. Unfortunately, based on the chart below, it appears as though the stock may have topped out.
During the past 52 weeks, the stock has gone from a low of $29.65 to a high of $39.00 (which occurred just recently). Now if we pay close attention, we will see that the stock got to the mid 38s back in the fall last year. And now just recently, the stock once again reached the high 30s. Both times, the stock fell off quite rapidly. Although the reason for the latest sell-off was because of an extremely disappointing earnings report, which leads us to the second reason why investors should go short AT&T.
Reason No. 2 - Fundamentals
On April 23, 2013, AT&T released its first-quarter earnings report. The numbers were actually quite disappointing and the stock fell about 5% during the next day's trading session because of it. We can actually start by looking at the operating revenues, which came in at $31.4 billion, a decrease of 1.5% from the same period in 2012. This was also lower than the average analyst projection which was pegged at approximately $31.7 billion.
In addition to disappointing revenues, there were some other items in the report that should raise investor eyebrows. AT&T has a section called "Other Segment," which includes AT&T's proportionate share of results from America Movil and YP Holdings. It also includes financial impacts from corporate costs not allocated to operating segments. So for this "other segment," the first-quarter operating loss came in at $368 million compared with a loss of just $230 million for the same quarter in 2012. Revenues were also light coming in at $10 million compared with $13 million for the same period a year ago.
Now if we turn our attention to the balance sheet, let's focus on a couple key numbers. First, cash decreased by roughly $1 billion from the end of 2012 and now sits at $3.9 billion, compared with $4.9 billion before. AT&T is often thought of a "cash cow" so shouldn't the cash be increasing despite its dividend and buyback efforts? If cash keeps dwindling, eventually either the buybacks or the dividend efforts will need to be cut. And lastly, the long-term debt increased by approximately $4.3 billion from the end of 2012 and now sits at just over $70 billion.
The fundamentals appear to be deteriorating for this once highly thought of company.
Reason No. 3 - Growth Numbers Compared With Verizon
Digging into the numbers a little deeper will uncover some trends that should be somewhat alarming to investors, especially when compared with one of AT&T's largest competitors, Verizon Communications (VZ).
First, AT&T added 296,000 "postpaid" customers under contract during the first quarter. This actually came in above expectations but well below the 677,000 postpaid customers added by Verizon during the same period.
Second, while AT&T's revenue came in well short, Verizon actually was able to increase its revenue quarter over quarter by 6.8%. Jefferies analyst Thomas Seitz said in a report about AT&T that "wireless and wireline revenue and EBITDA (earnings before interest, taxes, depreciation and amortization), postpaid ARPU (average monthly revenue per subscriber) and prepaid net subscriber adds were lower than expected."
Lastly, while AT&T sold roughly 6 million phones during the first quarter, Verizon was able to sell 7.2 million.
The trends appear to be in Verizon's favor and while Verizon is growing revenue, AT&T appears to be going down the wrong path.
AT&T still has a fairly strong dividend yield at 4.7%, which can certainly offer appeal. However, there has to be some concern about the fact that AT&T's cash decreased by roughly $1 billion during this last quarter. Combine the shrinking cash pile with the disappointing growth numbers, and the fact that Verizon appears to be taking market share from AT&T, and there is no choice but to strongly considering going short AT&T.