From multi-billion dollar fund manager Whitney Tilson to lesser known stock analysts and traders, Netflix (NASDAQ:NFLX) has been a popular stock to sell short in 2011. Indeed the innovative movie rental provider is priced to continue massive growth despite market saturation, growing competition, higher shipping costs, late availability from movie studios and a struggling U.S. economy.
Netflix is not on my buy list at current levels, though I do not consider the stock a short-sale candidate. The primary reason is simply that Netflix offers customers value. For at little as $5 per month, subscribers enjoy unlimited online streaming and can rent one DVD at a time through the mail. With real wages dwindling and austerity measures imminent as local and federal budgets continue to fall short, consumption in the United States by lower and middle class is due for an epic setback. Millions of American homes pay $100 or more monthly for cable, satellite, premium channels, sports and movies. These are the subscriptions at risk of cancellation and potential new Netflix customers.
The second main reason to avoid shorting Netflix is that margins are astronomical. Advertising costs are low and shrinking, as are movie costs. If commodity prices continue recent slides, existing subscribers alone could justify the trailing earnings multiple of 70.
Netflix is an expensive stock, but the growth history is strong and viable profitability is evident. The current market environment does, however, warrant exposure to the short-side. Investors looking to avoid options and leveraged ETF premiums without losing potential for big gains in a sell-off can sell shares of overpriced individual stocks short. The following five companies are extremely expensive based on operating history and projections, and several suffer from inefficient business models unable to sustain higher input costs or lower sales volume.
1. DineEquity (NYSE:DIN): From May 2008 to March 2009, shares of the holding company that operates and franchises Applebees and IHOP restaurants fell from over $50 to under $6. Food costs have risen substantially, as have consumer propensity for value and nutrition - none of which bodes well for America's worst steakhouse and a more expensive alternative to Denny's. DIN currently trades over $54 despite failing to profit in fiscal years 2008 and 2010. The company has more debt than assets and revenues have declined each year since 2008.
2. CB Richard Ellis (NYSE:CBG): In early April I suggested shorting real estate services firms. Since then CB Richard Ellis reported a dismal quarter and is down from $28.50 to below $27/share. CBG eeked out combined net profits of $230M in 2009 and 2010 after losing over $1B in 2008, thanks largely to acquisitions outside the U.S. With loads of debt, massive insider selling in recent months, business grinding to a halt throughout the Middle East, austerity stricken Europe and CB Richard Ellis "for lease" signs littering industrial and commercial areas throughout my home state of California, CBG shares may soon retest 2009 lows near $2.
3. Linkedin (NYSE:LNKD): When markets are overly optimistic, IPOs tend to overheat and make fools of impatient profit chasers. The appeal of something new in a market low on both growth and bargains has been quite a boon for Linkedin underwriters. Buyers on the NYSE have thus far done well to pay only twice the $45 per share operators of the business networking community received in taking the company public. Investors who bought near the peak on LNKD's first day of trading are already down over 30%. The current state of the global economy suggests peak growth may be in the past for LNKD and short-sellers can do almost as well as underwriters by betting against the $9B valuation and trailing P/E over 500.
4. Foot Locker (NYSE:FL): In recent reports manufacturers, particularly Nike (NYSE:NKE), discussed margin squeezes resulting from an appreciation in commodities. Retailers without a stake in the manufacturing process are even worse off. Sales staff and mall leases will make it more difficult for Foot Locker, Nordstrom (NYSE:JWN), JC Penney (NYSE:JCP), Pacific Sunwear (NASDAQ:PSUN) and other retailers with competitive disadvantages vs. online only stores and manufacturers that sell directly to consumers. FY 2011 is complete for Foot Locker, which was reported May 20th, sending FL to 5-year highs. Profits were up substantially YOY despite sales below 2008 and 2009 levels. In October 2008 the stock was also in a sharp uptrend, and arguably priced for perfection, before it fell from $15 to $5 per share in less than a month. The best appears to be in the past for Foot Locker, as higher prices, decreasing mall traffic and strapped consumers threaten to eliminate traditional retail shopping.
5. Priceline (NASDAQ:PCLN): Travel agencies, whether in strip malls or on computer screens, epitomize business operations that do not add value for consumers. Priceline, Travelzoo (NASDAQ:TZOO), Orbitz (NYSE:OWW), Ctrip (NASDAQ:CTRP) and other travel agencies exist so hotels and airlines can focus on operations other than sales. If margins or sales volumes decline, at some point airlines and hotels are incentivized to assume sales obligations. China East Airlines (NYSE:CEA) uses online giant Alibaba (OTC:ALBCF) to directly sell discounted plane tickets through Taobao.com. Airlines worldwide have every reason to follow suit and profit from the most lucrative part of their business. Priceline's performance confirms the profitability of the business model, but earnings growth expectations seem overly optimistic given the size of the company, market saturation and global conflicts threatening travel. A P/E in the high twenties may be justified if market conditions improve, but they may worsen and the current valuation is near 45x trailing earnings. Insiders have made dozens of open market sales in recent months, including a $550M+ transaction by CEO Jeffrey Boyd on May 10th.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in DIN, CBG over the next 72 hours.