Two Stocks to Short: Marriott, Green Mountain

Since early March, the S&P 500 has risen 44% to its recent high, it is unlikely to go on at this pace for very much longer. We are still seeing overall losses in earnings and losses in revenues. Efficiency measures are lessening the losses in earnings, but this cannot go on forever. In order for the economy to grow, we will need overall increases in revenues.

Currently we seem instead to be riding a wave of almost irrational exuberance. The earnings bar was set at approximately -36%. The S&P 500 stocks are beating that so far (as of the end of last week) by 10%. They are still reporting on average substantially lower earnings than 1 year ago.

The fundamentals for a continued rise in the markets are just not there right now. The rise can go on. It may ride the tide of earnings beats until the end of the earnings season (or it may not). At that point, barring some unforeseen magic, the market will almost have to retreat. It may not wait that long.

If this retreat does occur, I have picked out two stocks that should outperform to the downside.

Marriott (MAR) is a high end hotel chain. Its profits are consumer driven. It is supposed to suffer further decreases in earnings through out this year. Then next year it is currently estimated to hold steady on those reduced earnings.

However, this may not happen. In fact the analysts have decreased their estimates for MAR earnings for both 2009 and 2010 significantly in the last month. MAR did beat earnings estimates (July 16 reporting date), but it was by very little.

This has caused the stock to hold its price for the moment. When a significant retracement starts, it will retrace significantly. The unemployment rate is still going up. It will likely be higher than it is now through out 2010 (i.e. 10+ %).

This single factor will cause MAR’s earnings to go even lower than they are now. Unemployed people do not spend money on high end hotels. People who are worried about becoming unemployed do not either. Businesses cut back their budgets. Many businesses may specify lower end hotels over the next year or two.

That redirected business may be hard for MAR to get back. The current TTM PE is 78.0. The predicted FY 2009 PE is 25.7. The predicted FY 2010 PE is also 25.7. The risk on these last two numbers is definitely to the downside. The trend in the analysts’ estimates is to the downside. The revenue estimate for 2010 is slightly lower than that for 2009. No one is seeing an upside soon.

This lack of hope is what will send this stock downward. Its PE is too high. MAR’s predicted PEs are still too high. Its predicted PEs have substantial downside risk. There is no ray of sunshine. It has a debt to capital ratio of about 63%. It will struggle with its debts in a high vacancy market. It has a Price to Cash Flow ratio of approximately 15.

This stock has already started trending downward in a market that is still trending upward. Even a small earnings beat did not stop this. It should take off downward when the entire market begins to retrace. The put to call open interest on MAR is 1.23. The chart is below:

The second stock I have selected has been a popular stock lately -- “too popular” to my mind. Green Mountain Coffee Roasters (GMCR) operates in the specialty coffee industry. It has been growing its earnings. It has been growing its revenue. This is supposed to continue.

Why am I suggesting it as a short then? First it is in the high end retail business. As the unemployment level rises and stays high for the next couple of years, the high end retail market will get hurt. People will conserve. GMCR sells to offices, hotels, retailers, and directly to consumers. All of these groups will be trying to conserve money. This will hurt GMCR.

Next, GMCR has a great chart. It has done nothing but go up. It has consistently beat earnings estimates. However, that is exactly the problem. The market has liked it so much that it has bid it up to a ridiculous multiple. GMCR is trading at 64 times TTM earnings. It is trading at 65 times 2009 predicted earnings. It is trading at 46 times 2010 earnings.

It is not reasonable to expect it to keep such a lofty valuation in the face of the almost surely high unemployment of the next two years. Even the analysts have started having their doubts. They have lowered their earnings estimates for both 2009 and 2010 in the last month.

This is likely a sign that a change of direction is near at hand for GMCR. I do not mean that it will sink into oblivion. I merely mean that it will retrace from its lofty heights to a more reasonable earnings multiple. GMCR is predicted to grow at about 28% per annum over the next 5 years. This number may well be at considerable risk. A 28 PE might be more reasonable for this kind of growth, especially when the growth is at risk.

Both the debt to capital ratio of 40% and the TTM Price to Cash Flow ratio of 42 indicate there is ample to worry an investor if this company experiences any substantial headwinds. The company has 35% short interest, so keep in mind that it is vulnerable to a short squeeze. If the market starts going against you, you will likely want to exit your short quickly. The beta is 1.3.

The stock is 95% owned by institutions; when the institutions start bailing, which should be soon, the stock could go down dramatically.

In addition to the fundamentals, the chart below would tend to substantiate my thoughts on a retracement possibility. GMCR is $26 above its 200-day sma. It is $10+ above its 50-day sma. It is near its top Bollinger Band. The bottom Bollinger Band is about $15 below its current price. The Williams %R is signaling that GMCR is overbought. The Money Flow Index is neutral in an up market. The Money Flow Index seems extremely likely to turn negative in a retracing market. It definitely shows that interest in bidding the stock up further is waning.

Still, this stock is trending upward. You would not want to short it without the market behind you. With an overall market tailwind, it is likely an excellent short though. The trick will be to get in at the right price. It has bounced off of its 50-day moving average any number of times.

If you get a chance to short this stock above $70 in the near term, that is probably a good play. If you wish to wait for the market to be assuredly heading downward, you probably want to try hard to get in at $65 or higher.

The downside move may be limited to the 50-day sma line. More aggressively it could move to its lower Bollinger Band. It is highly overbought. The 200-day sma line is probably the very deepest you could expect it to fall in the near term. The company reports earnings July 29. Given the company’s history it should beat. This may temporarily drive the stock price upward. You may wish to wait until after earnings to try to short the stock. The put to call open interest in GMCR is 1.41.

If you are looking for other shorts, I have recently written articles on LM (see here and here), HOG (see here), and CBEY (see here) which may prove to be profitable shorting opportunities in a retracing market.

CBEY put to call open interest is currently 3.10 on Schwab.

HOG put to call open interest is currently 1.36 on Schwab.

LM put to call open interest is currently 0.88, which is again curious since GS’s is 1.26. LM is trading at more than a 100% premium to GS. Rational thought would make one think LM has to come down.

Disclosure: I am currently short HOG and LM. I am considering shorting the other three.

Comments

[stealthnetx:]

Short GMCR? Funny. Many have followed that notion and been BURNED in the process. Get ready for great Q3 earnings today. 1.2 million brewers sold in the last two quarters (yes, just the last two, and both 100%+ increases year-over-year) = very nice K-Cup refill number = nice EPS. By the way, did you realize that Q3 is when the shipments to the 3000 Walmart stores are going to be realized (the deal was announced last quarter, but not reflected in earnings)? Brewer sales were already surging 100%+ before being in Walmart. Oh, and the brewer sales for Q3 2008 was "only" 150k. Additionally, there's the fact the royalty rate was increased from $0.05 to over $0.06 in August 2008 (20% increase in profit on every third-party K-Cup sold when comparing Q3 '09 vs Q3 '08... i.e. DDRX).

You've been warned.

stealthnetx

Jul 29 08:17 AM

[eljem:]

Mucho Loco!!!

Jul 29 09:54 AM

[David White:]

stealthnetx: I would just point out that I did advise people to wait until after earnings to sell GMCR short. By this I meant that one should wait until after the expected surge in the stock from the expected beat. Conceivably this could go on for a week or more. Many stocks do keep rising for that long (or a little longer) after a great earnings report. At that point GMCR should be even more overvalued. I did point out that there is the possibility for a short squeeze (especially around an earnings beat) since there is 35% short interest. However, this same short interest indicates that there is a lot of belief that the stock is overvalued.

Further many people are now thinking there will be a general market retracement soon. Such an occurrence would provide the desired tailwind for GMCR to move downward with less risk. For all the ballyhoo about stocks beating earnings estimates, the earnings are still down substantially from last year. We still have negative growth. This may become more apparent on Friday (GDP figures). Also earnings season will soon be over for the S&P500. This has been one of the main driving forces for the current upswing. When it is gone, the market could drop quickly. Blind faith in a hot stock is usually a mistake. If you have made a lot of money in GMCR, you might consider taking some profits soon.

Jul 29 10:36 AM

[David White:]

Perhaps I played it too safe. GMCR reported $.36/share earnings today after the close. This beat the estimate of $.28/share by $.08. This seems like a reasonably good beat. However, revenue of $190.5M was below estimates of $194M. The FY2009 guidance was significantly above the current estimates.

It would appear that stealthnetx's opinion above reflected the expectations of the street. The expectations seem to have been baked in to the price. The guidance, which would take into account the new Walmart business, was less than some expected. As a consequence, the stock crashed. It is currently trading at $60. It is still overpriced in my book. However, I would not feel comfortable shorting it at this price. Too many things can go wrong.

I had the right idea, but I am afraid I was not attuned to how the street had apparently baked in very high expectations for guidance. I have no recommendation about this stock currently. I will try to reassess it.

MAR has already reported earnings. It is behaving as I would have expected. That recomendation would still appear to be a good one.

Jul 29 04:18 PM

[David White:]

Another confirmatory piece of evidence that MAR is a good short is that there have been 1.24M shares sold by insiders in the last 6 months. Insiders own a total of 75.85M shares of MAR.

Jul 30 02:37 AM

[Zachary Sch...:]

Can't agree with you more, although I was early to the game on GMCR (zachstocks.com/2009/06.../) - It's certainly over-valued and prone to a "fad" crash. But timing is very difficult in these situations.

Playing with options like you suggest certainly helps cut back on some of the risk.

Jul 30 04:26 PM

[3percenter:]

I sold a strangle on GMCR to play on the high pre-earnings volatility. Working out very well so far.

Jul 30 07:51 PM

[David White:]

Typically a stock may benefit from good earnings for a week (or sometimes longer). The good news comes out. Then one or more analysts upgrade their rating of the stock. Then the average analysts estimates for earnings are upgraded. Each factor may cause a pop in the stock. If you are thinking of shorting GMCR, consider these factors along with the market trend.

Some people think the market will trend downward after the earnings season is mostly over. The earnings have been going down, but the beats tend to push stock prices up. With the end of earnings season, there will be few major earnings beats to push the market up.

Jul 31 12:05 PM

[Eric in IL:]

GMCR "high-end retail???" Are you kidding. They provide the McDonalds coffee. I wouldn't call that high-end, i'd call that High Growth. I gotcha on the overvalued theory here... it should have a 50P/E, but still. I wouldn't short this name. I'd just buy it lower.

Jul 31 01:31 PM

[Diogenes of...:]

GMCR is a great short idea: stock has gone straight up since Nov '08, small float, high short interest. Better yet, take your money, put it in a nice little pile in the back yard, douse it with lighter fluid, and light a match. It's faster and less aggravating.

Jul 31 04:26 PM

[David White:]

FYI: A Motley Fool article just mentioned both GMCR and HOG as two fo 5 stocks that investors most need to lock in profits on. It was suggesting selling or buying puts. If the Motley Fool is getting others to sell their GMCR, that will help the thesis of this article.

Aug 05 04:49 AM

[emperor:]

stealthnetx said it all. I have had the stock since late March. The shorts are losing theirs.

Aug 05 10:10 PM

[David White:]

Another factor which may play into the market direction may be the recent crackdown by the SEC on illegal short sellers. Apparently on Wednesday this led to the heavily shorted stocks outperforming the non-shorted stocks to the upside fairly dramatically. See the following article by Bespoke:
seekingalpha.com/artic...

HOG short interest is 19.47% of the float. GMCR short interest is 33.65% of the float. MAR short interest is 12.64% of the float. This SEC factor may provide some short term distortions of what one might normally expect from the stocks performances. Longer term it likely won't matter.

Aug 06 12:43 PM

[David White:]

Dr. Roubini now forecasts below par growth for the US of about 1% for both 2010 and 2011. If he is right, this likely means there will be no upturn for HOG anytime in the near future. It also means continued high unemployment for a long time, which means trouble for HDFS’s loans. HOG had trouble getting the money for HDFS to continue to operate in 2009 (about $1B). HOG will have even more trouble getting money in 2010 and 2011. It's credit rating (lowered to BBB recently) is likely to get lowered further. The loans the HDFS is now holding "for investment" may go into default in large chunks. This will further increase HOG's problems.

Supporting Dr. Roubini's thesis, Paul Krugman, a Nobel Laureate economist, is now saying that the world needs a second stimulus to avoid a lost decade (such as Japan's of the 1990's).

Notably both the US Congress and President Obama have said they have no plans for a further stimulus at this time. Obama insists that the current stimulus will start to be felt more as time goes on.

Congress does keep approving more money for things like cash for clunkers. However, this doesn't really help HOG. This program applies only to cars.

Aug 10 03:37 AM

[David White:]

Chevy announced an mpg spec on the Volt of 230mpg, which Chevy called conservative. Volt will have a 300 mile range. This is likely to hurt HOG, which is now more obviously a "gas" HOG.

Aug 11 08:42 AM

[recession g...:]

what?

how are the chevy volt and a harley at all comparable? youre talking about a super-practical crap-box for the cost conscious vs. a summer weekend toy for the middle aged

Aug 15 08:30 PM