According to what I read on Thursday, the world has been saved now that Europe has put some sort of rescue plan in place. We are now entering a new chapter of financial history, so the last 3 months, or year, or whatever period you want to use, is history.
So let's say you are looking to start a million dollar short portfolio today. What should you do? Well, I'm going to build a theoretical portfolio here of companies who I believe are either currently overvalued, or whose businesses I do not favor going forward. As I mentioned above, I'm only going to use seven stocks, but they will not be equally weighted. Here is the portfolio, and I'll discuss each holding afterwards. We'll assume a $1 million portfolio.
|Company||Shares||Buy Price||Start Value|
|National Bank of Greece (NBG)||250,000||$0.59||$147,500|
|Suntech Power (STP)||44,500||$3.08||$137,060|
Amazon recently reported a bad quarter and projected a possible operating loss for the fourth quarter, its busiest quarter of the year. As I recently detailed, I think this stock goes lower. Amazon has extremely low margins, so any earnings growth is usually based off of revenue growth. Next quarter, the company might even lose money, and analysts were expecting a decent size profit. Before earnings, the Forward P/E was close to 71. Thanks to a nice bounce back and a 2 cent drop in next year's expected earnings, the Forward P/E is still high at 68. I cannot see that valuation lasting much longer.
Sprint is losing too much money for my liking right now. As I recently explained, the company needs $7 billion in new capital. With a market cap of $8 billion and over $18 billion of debt already, this new figure is not appealing to me. I think equity will be raised at some point. Also, estimates for 2012 earnings in the past 90 days have been reduced from a loss of 51 cents to a loss of 92 cents. That's $1.2 billion dollars. This company can't continue to lose $3 billion a year forever. Raising money will force additional losses, and that will take shares down even more. I might cover this position at $1.75 or $1.50.
Netflix: As I thoroughly detailed, this was a terrible quarter for Netflix. Even after the lowered subscriber guidance and DVD business spinoff flop, the company underperformed. It was then forced to lower guidance, stop buying back shares, and put international growth plans on hold. If its business model wasn't in question before, it certainly is now. That's why this is a great short opportunity. Thanks to a $7 bounce back so far, I can feel a lot more comfortable shorting at $84 than I would at $77.
National Bank of Greece: Does anyone think the common stock of any Greek bank has any value? I certainly don't. Europe may have agreed on a tentative plan, but I think there are still several issues there. Greece will have to suffer, and the banks will go bust in my opinion. This stock goes to $0 eventually in my view.
Suntech Power: I don't trust any solar name right now, especially the low priced Chinese solar names. Hitting a wall would be a compliment for the industry. Prices have come down dramatically, demand is not where it should be, and government subsidies are being cut left and right. This stock has nearly doubled in the past month. I think it's a great short here.
Apollo Group: I'm not a fan of for-profit education businesses, and never have been. The government has tightened restrictions on them recently, and I think it gets worse for the sector going forward. Costs are rising, and I just don't see how these companies can survive right now. In the past few quarters Apollo has decreased assets but liabilities have risen. The stock is near the upper end of its yearly range, and is the most expensive in the industry. I think it comes down from these levels.
Orbitz: From 2010 to 2012, Orbitz is expected to grow revenues by about 7% but earnings will stay flat. I don't think that it can compete with the others in its industry. I'm never a big fan of travel sites, as I prefer just to go to the airline's or hotel's specific page. Orbitz's balance sheet has been getting steadily worse over the past few quarters, so I'm not sure how much this company will last.
I've chosen these names because I believe they are either all overvalued or have a business that just isn't working right now. None of these names offer a dividend, so we won't have to worry about taking that into consideration. For the purpose of this exercise, I'm going to ignore borrowing costs on the short positions. I'm just going to track it on pure price movement.
I will continue to monitor this portfolio and will report the progress at the end of each month. If there is some massive move, like a buyout or bankruptcy, that causes me to close out a position and enter a new one, I will use an instablog post to deliver that information.