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This is the third article in a three part series detailing fourteen high conviction short ideas for a market on the verge of a significant breakdown. See Part 1 » and Part 2 »

Capstone Turbine (CPST)

Capstone Turbine is one of those companies that has seemingly been a year away from profitability for five years now. The brighter future is always just around the corner, leaving investors waiting for the earnings that never come. The company is one of the many trendy alternative energy companies that have interesting technology but are unable to monetize it sufficiently to become profitable. Despite regularly signing high profile contracts with notable clients such as the Four Seasons Hotel Philadelphia, the company continues to bleed red ink.

While the company may eventually become profitable (despite a negative 41 percent operating margin last year, analysts anticipate a slender profit in the coming year), Capstone's present valuation is much too great. The alternative energy sector is full of story stocks such as Capstone who are assigned great valuations based on potential. This is fine in bull markets, but as we enter a bear market, investors will reconsider the $400 million market cap they have assigned to this small and consistently unprofitable enterprise.

The company only has thirteen cents a share of cash, and if it fails to achieve profitability in the next year, it will probably have to do another capital raise. With the company selling at 11 times book value, there is no guarantee that an equity offering could be completed anywhere near the current market price. Unless Capstone finally becomes profitable in the near future, the stock is going much lower in coming months.

Standard Pacific (SPF)

Short-sellers had a field day with homebuilders during the great financial crisis several years ago, and they will enjoy similar success this time around. Standard Pacific offers short sellers the chance to short sell a flea-ridden company within a lousy sector; a true win-win for the bears. The bearish case for Standard Pacific is short and sweet. This company lost money over the past year, reporting a loss of nine cents a share. And if you couldn't make money as a homebuilder last year, with all sorts of government stimulus, a somewhat recovering economy, and historically low interest rates, how on earth can you possibly expect to make money in the future?

Standard Pacific suffers from many problems. For one, it is in the wrong markets, with large amounts of exposure to moribund housing markets in Arizona, California, Florida and Nevada. The company is already shrinking, with revenues off 18 percent year over year. With the company's revenues already shrinking and the company hemorrhaging money (the company's operating cash flow was negative $224 million over the past year), it is increasingly difficult to see a route where the company can continue to service its $1.34 billion of debt (which is equal to 2.5x the company's market cap). Add in a renewed economic contraction and a likely higher interest rate environment in the coming months, and Standard Pacific's next stop appears to be insolvency. It seems highly unlikely the company will be able to raise additional funds from the equity markets or from bonds as its losses mount in upcoming quarters.

Beazer Homes (BZH)

For those wanting a double-dose of homebuilding in their short portfolio, Beazer Homes also offers a compelling short-sale opportunity. Like Standard Pacific, it is already unprofitable, even in a relatively decent economy. It will also see its financial position become increasingly untenable as the economy contracts and the housing market resumes its decline. The company sports more than a billion dollars of debt against its meager $214 million market cap, suggesting that Beazer won't be able to stave off bankruptcy through capital raises. Beazer's one edge, in comparison with Standard Pacific, is that it has a stronger cash position, thus giving it a little more time before it runs out of capital. But, if the economy weakens, as I anticipate, and interest rates start to rise, the double-whammy will knock out both Beazer and Standard Pacific.

LG Display (LPL)

LG Display, unlike many of the companies featured in this article, has a good solid business and a solid management team. However, it is simply in the wrong sector at the wrong time, and investors have failed to appreciate just how much worse things can get for LG Display before the sector hits bottom. As has been widely reported, flat-screen TV sales have been quite poor in recent months, and LG Display's other key product categories such as notebook screens have also been facing declining demand. As the economy's weakening intensifies in coming months, LG Display's business will continue to struggle. Given the poor sector outlook, it is hard to justify the market's willingness to pay more than thirty times trailing earnings for LG Display. With revenues declining and the company giving out poor guidance, there is no reason to expect LG Display's stock to stop sliding anytime soon.

AbitibiBowater (ABH)

Though AbitibiBowater was able to emerge from bankruptcy last year with a much-improved balance sheet, bankruptcy was unable to fix the company's primary problem – which is that its main product in newspaper ink. The company has already returned to its disappointing ways, missing analyst's estimates by a wide margin last quarter due to a variety of negative factors including higher costs and a strengthening Canadian dollar. Despite recent weakness in the stock, the company still trades with a $1.8 billion market cap.

It seems hard to justify a market cap that big when large newspaper publishers such as the New York Times Company (NYT) or McClatchey (MNI) have much smaller market caps. If the newspaper is worth so little, how can its supplier retain such a high valuation? While AbitibiBowater may one day be a value stock, for now, it merely remains a falling knife. The newspaper industry performed exceptionally poorly during the great financial crisis, and it will likely have a similarly bad run in the upcoming economic slowdown. With newspapers struggling against negative cyclical and structural trends, it is hard to see a key supplier such as AbitibiBowater outperforming the market as a whole.

Globalstar (OTCQB:GSAT)

Globalstar is a textbook example of a company with an interesting business plan that simply didn't work out as hoped. The company operates satellites that provide mobile voice and data services to businesses and consumers. It has been unable to make this model profitable; the company has remained consistently in the red as it has been dogged by poor management and a high cost structure. The company, trading at $1.00/share, lost $68 million (23 cents a share) on merely $70 million revenue over the past year.

The company recently exhausted its cash supply and had to do a $38 million capital raise. Even so, this cash is unlikely to last long at the company's current rate of losses. The company is now up to almost $700 million of debt, compared with less than $40 million of cash and a market cap of $312 million. For a company who is one failed capital raise away from bankruptcy and which just lost its CEO, one has to wonder what the market is thinking when assigning it such a generous market cap. I'm hesitant to pay 4x sales for even a well-run business. But GlobalStar trades at 4x sales with terrible underlying business fundamentals. With a shaky management team, a long history of unprofitability, a huge debtload, and a very poor cash position, it seems highly likely that GlobalStar will keep making fresh new 52-week lows in coming months.

Source: 14 Compelling Shorts for a New Bear Market (Part 3)