With U.S. equities increasing in value as stocks have risen off their fourth-quarter 2011 lows, it is time to look for good candidates to short in anticipation of an equity market decline. Given the current regulatory and economic environment some financial firms could be good candidates for shorting. We'll take a look at Citigroup Inc. (C), Goldman Sachs Group, Inc. (GS), UBS AG (UBS).
A look at the income statement of the firm reveals that sales the past five years have declined at an annual rate of almost 5 percent. Earnings the past five years declined at an annual rate of 38.5 percent. Earnings this year grew at 1.2 percent; Citi hasn't regained its earning power post great-recession and remains a fundamentally weak concern.
While earnings next year are projected to grow at 11.4 percent, some skepticism is required. How will Citigroup grow earnings at an 11.4 percent pace given its weak earnings growth right now? Given the trend of declining sales the past few quarters and declining net income Year/Year, it may be unlikely that Citi will grow earnings at that pace.
Additionally, $175 million of insider selling took place on December 19. If insiders aren't supporting shares, why should outside investors? The answer is, they shouldn't.
The price of common equity shares is well off its 2011 high of $50; Citi is underperforming the market during the rally off the fourth-quarter 2011 low. Common equity shares of Citi have increased in price while sales have declined. The price-sales ratio has risen from roughly 0.90 to almost 1.4. Citi is about 55 percent more expensive than it was at the end of November.
Given the analyzed valuation and fundamentals of the firm, investors should short Citigroup because it should outperform the market on the way down during an intermediate reaction.
Goldman Sachs Group
Sales and earnings have been under pressure at Goldman. Quarterly sales Y/Y declined 13.5 percent while earnings the past five years declined at an annual rate of 15.7 percent. Earnings this year dropped 65.8 percent. Earnings next year are projected to grow at 11.2 percent. Goldman Sachs earnings will be hurt by the ban on proprietary trading and earnings forecasts for the bank may decline.
During April Goldman sold almost $400 million of its own shares. The firm isn't supporting its shares and investors would be wise to do the same.
Common equity shares are well off their 2011 highs as Goldman has shown its ability to be considerably weaker than the market. Shares of the firm are also underperforming on the way up off of the fourth-quarter 2011 low.
The price-sales ratio has increased from roughly 1.5 to 2.2. The firm is 47 percent more expensive than it was at the beginning of the year on a price-sales basis.
Given the ban on proprietary trading and the weak sales and earnings numbers coming out of Goldman, investors should short shares of the investment bank. Goldman Sachs should outperform the market during an intermediate decline in share prices.
Sales at the Swiss bank have grown over the past five years at an annual rate of 2.8 percent. Earnings the past five years increased at a 16.4 percent annual pace. This year earnings were flat and next year earnings are expected to grow at 10.7 percent.
Shares of the money center bank are up 4.6 percent YTD, trailing the market. That may have something to do with the debt-equity ratio of 18.1.
The firm has a negative operating margin. Profit is 10.4 percent of net sales.
UBS looks cheap on a valuation basis given the 3.1 price-earnings ratio and the 0.5 price-sales ratio. That may have something to do with the massive pile of debt.
UBS and its debt burden are poised to underperform the market on the way down. Investors should put shares of the Swiss bank on a "to short" list.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.