Short Ideas: Strapped For Cash And In Debt

Includes: BKD, HK, WEB
by: Furbonacci

Shorting stocks can be extremely difficult and can cause you to take a loss even though your original thesis may prove correct. The amount you can lose in a short play is limitless, especially if the stock you are shorting is illiquid. That being said we would like to examine the following three stocks based on the following:

Price / Free Cash Flow over 40 - This number helps us filter out stocks that can repurchase shares with the cash the business is currently generating. The higher the price / free cash flow number the better for the short seller.

Price / Cash over 40 - The less cash the company has on its balance sheet, the harder it is to roll over and pay existing debt. Cash on the balance sheet usually represents a floor for a share price as buyers will use the cash as justification to strip out the cash and value the business as much cheaper than it really is.

Debt / Equity over 40% - The more debt a company takes on, the less nimble it can be in the credit markets. If business turns sour and the company already has a sizable debt load, it will have to pay a higher interest rate than its peers, hurting the company's overall cost structure and profitability in the future.

Negative Return on Equity - This is a measure that helps us gauge how profitable the company has been with shareholder funds. This number can often be gamed by adding debt so it is best used in conjunction with a high debt / equity ratio.

Current Ratio - This is a basic current assets / current liabilities calculation that measures the short-term liquidity of a company. The higher the number, the more assets a company has to sell off during difficult economic times. A lower ratio means a short downtick in business and can be a great opportunity for short sellers to realize profits.

The following three stocks meet these criteria and are listed in order of lowest Current Ratio:

1. Brookdale Senior Living (NYSE:BKD): $17.83

Industry: Long-Term Care Facilities

Price / FCF Price / Cash Debt / Equity ROE Current Ratio
68.66 68.66 2.37 -6.49% 0.45

2. Group (WWWW): $13.60

Industry: Internet Information Providers

Price / FCF Price / Cash Debt / Equity ROE Current Ratio
61.93 49.37 2.65 -6.67% 0.59

Shorting stocks can be a great way to hedge your portfolio, but please use this list as just a starting point for your research.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.