Best And Worst Of 2011 Part 4: Short Sales

Includes: APOL, BAC, MSG, RRGB
by: Nicholas Pardini


Shorting For Profit Colleges: The student loans bubble is starting to let out air and for-profit colleges such as the University of Phoenix via Apollo Group (APOL), DeVry Inc. (DVY) and ITT Educational Services (ESI) have the most to lose. While APOL has returned to its August highs, DeVry and ITT have fallen over 40% each. Expect their declines to continue as these companies rely on student loans (which will decline as students realize the lack of value of a for-profit college degree) to fund over 50% of revenue.

Shorting and Getting Out of Bank of America (BAC): Shorting BAC at $5.83 and getting out at $5.07 resulted in a quick 13% gain for investors in early December. Even with the recent technical rally in financials, Bank of America is still the weakest of the major US banks. With bad loans from Countrywide continuing to push the company to the brink of insolvency, BAC is still a good long-term short. However, only enter at a favorable technical entry point.

Shorting Red Robin Gourmet Burgers (RRGB): Like other midlevel restaurant companies such as Ruby Tuesday (NYSE:RT) and Darden Restaurants (NYSE:DRI), Red Robin has struggled with the decline of middle class Americans going out to eat. Red Robin has gone down 15.57% since my recommendation to short June 12. Its valuation has fallen to a more reasonable level since then and I recommend covering any current shorts. However, growing income inequality and the stratification of consumer goods to luxury or bargain basement products will leave mid-tier restaurants struggling for the forseeable future.


Selling off Mortgage REITs - Mortgage REITs are a long-term time bomb. However, with Ben Bernanke extending 0.25% interest rates to at least mid-2013, borrowing spreads will remain for mREITs for the forseeable future. However, treat these REITs as medium term (3-12 months) dividend generators and sell off at the first signs of a Fed rate hike.

Shorting Madison Square Garden (MSG) - The NBA and the players union pleasantly suprised basketball fans by salvaging a 68-game season and ending the NBA lockout. I'm happy that the Lakers are back, but I ended up losing money on this trade. The fundamentals of MSG are very strong as a better Knicks team, a renovated arena, and the recession-proof nature of sports makes the company an excellent buy. I have a limit buy order for MSG at $26 as it needs to fill an island gap up.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in BAC over the next 72 hours.