On the early morning of Friday Sept 2 I authored an article called "Simon Property Group: 3 Reasons I'm Short". I realized based on reader replies I need to include additional reasons:
4) Regarding a 2.7% yield, there are other stocks paying 5 - 6% that are not trading at such absurd P/Es and 700% of book value, also that yield and total return will be very painful if you ride this stock down to under 30 again, as happened in 2009. I will also add look at 2009, these high price retailer sales plummeted as did their stocks, 2011 2nd half and 2012 will look very similar to 2008 and 2009, in my humble opinion, based on massive fundamental facts regarding world debt, deficits and economies.
5) Reviewing cash flow at Simon Property Group, Inc. (SPG) and using it to support an approximate $34 billion valuation does not add up. Cash flow ending in 2010 shows a negative cash flow of $3.1 billion. First half of 2011 shows negative cash flow negative of about $7 million.
6) Massive debt and liabilities at SPG total $19.648 billion dollars. This creates a high degree of risk for a company relying on high priced retailers in mall locations to maintain profitability. Another risk would be higher interest rates and this could rapidly destory their earnings.
7) GAAP NET PROFIT at SPG does not support current valuation. Reviewing income statements year ending 2010 shows a GAAP net profit of $610.4 million. First half of 2011 shows GAAP net profit of about $374 million. This does not justify a valuation of $34 billion. If they were a drug/biotech with a 20 year patent on a new cure for cancer with a guaranteed 80 - 90% margin on billions in sales growth looking forward they would deserve this but clearly this is not the case. At current run rate, the P/E is about 45, absurdly high for a company that is clearly not a hyper-growth company. To deserve a P/E of 45, the next several years of growth would need to be 45%, truly impossible for this mall owner in a coming recession.
8) The risk of world and USA economies heading into a double dip recession is a high probablity. If this occurs, look at the 2008 and 2009 peformance of SPG during the prior recession, it dropped from over $100 per share to under $30 per share in less than one year! A potential loss of 70%!
9) Slow stochastic technical analysis on SPG shows a recent peak around 80 (indicating overbought), and as of Friday, it has crossed below 80 triggering a sell/short signal.
10) Last but not least, massive insider selling since Dec 2009 starting in the $70 range per share. A quick review indicates numerous insiders (executives and directors) sold over $60 million worth of stock from Dec 2009 to August 30, 2011. In fact there was not one insider purchase during this time frame as indicated by Yahoo finance reports. Massive insider selling by numerous officers and executives as in the case of Simon Property Group is a major red flag. Why would an investor buy at $110 - 117 range when the insiders are selling tens of millions of dollars worth in the $70s to 117 range? Clearly, the insiders are far more intelligent compared to the investors buying at these levels. What you want to see is like in the example of Morgan Stanley (NYSE: MS) where numerous insiders are buying their stock verus dumping it!