3 Stocks To Short Now

Includes: BBY, OFC, PBI
by: Bleecker Street Research

2013 has been a great year for stocks so far. The Dow is up over 6% and has been flirting with 14,000. Presented here are three short ideas. These companies face headwinds in their sectors, appear overvalued, or are facing significant margin compression.

Corporate Office Properties Trust (OFC)

Fundamentals: This REIT has a market cap of $2.4 billion, and since it is a REIT, must return 90% of taxable income to investors, usually in the form of a dividend. In 2012, COPT cut the dividend by 33%, to $1.10 annually. This amounts to a 4.23% yield. Its 2.15% ROA puts it behind the industry average of 3.12%, showing that COPT's management has been less effective than the industry average.

My reason for recommending this short is simple, COPT will be seriously affected by the upcoming sequestration and continuing defense cuts. Most of COPT's properties are in the urban areas of Washington, DC. More importantly, however, is that most of its customers are tied to government spending. It does not matter if the sequester happens or if it they kick the can down the road again, the sequester will eventually happen, government spending will go down, and the military will get smaller. When this happens COPT will no doubt see revenues drop as currently 64% of COPT's revenue comes from the U.S. government and Northrop Grumman. Making matters worse is that these two entities occupy the majority of their square footage, and it would be hard to quickly find replacements that would be willing to lease the properties. If it had long-term leases this would not be as problematic, but most of COPT's leases are one-year deals, with the rest being two-year leases. When the cuts do happen, COPT will feel the effects very quickly.

Pitney Bowes (PBI)

Fundamentals: Pitney Bowes currently trades at 5x P/E. PBI pays a $1.50 dividend, distributed annually; this results in a yield of 11.30%. The company has had quarterly revenue declines of 4% year over year. PBI has a book value per share of $ .55. Its total debt is $4.02 billion, compared with a market cap of $2.58 billion.

Pitney Bowes is the world's largest seller of postage devices. Enough said, right? Well there is more to the company, but I still think it is an excellent short, despite 28% of shares being sold short. Pitney Bowes has been trying to become a "big data" company, making acquisitions to get into the information technology and document management industries. This seems to be the direction many struggling "old" technology companies have chosen to go in, and the space is already crowded with excellent companies. Siemens (SI), Xerox (NYSE:XRX), and IKON Office Solutions (IKN) are already well entrenched, excellent companies that have dedicated customers. I think the risks of a dividend cut are somewhat exaggerated, as the company generated over $769 million in Free Cash Flow, of which only $300 million went to the dividend payment. The dividend was not cut during the last quarter's conference call, however CEO Marc Lautenbach did allude to that possibility in May. In short, Pitney Bowes' core industry is in a strong secular decline, and it is trying to grow by entering an industry that is already crowded with excellent companies.

Best Buy (BBY)

Fundamentals: Best Buy is the number-one retailer of specialty consumer electronics. Best Buy's net profit margin is a negative 2.43%. This means that losses were incurred on every dollar of revenue. Best Buy pays a dividend of $.68 annually. This amounts to a 4% yield. Best Buy's quarterly revenue has decline 3.5% year over year. As of January 2013, 14.7% of Best Buy's outstanding shares are sold short.

Best Buy is another company whose industry is in secular decline. I originally recommended shorting hhgreg (NYSE:HGG), but I now think that if you are going to short a consumer electronic retailer it should be Best Buy. Best Buy sells big-ticket items, and faces continued competition from companies like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) on the ground and from Amazon (NASDAQ:AMZN) online. The difference between Best Buy and hhgreg is that hhgreg understands what it is doing. Its sales people are paid on commission, and are required to get 200 hours of training before they start in stores. hhgreg has focused on customer service and embraces online sales, most importantly, however, hhgreg has a plan, something Best Buy does not. I believe that Best Buy will go the way of Circuit City and Border's. Will hhgreg eventually die out? I believe so, but I think Best Buy is going to die much quicker. The biggest risk with shorting Best Buy would be a buyout, or a short squeeze, given the high number of shares sold short (14% of shares). Best Buy is a company without a clear future; it is closing larger stores and is trying to increase points of presence by opening smaller stores with a mobile presence. Sounds kind of like Radio Shack, right? Instead of embracing what it is like hhgreg, Best Buy is trying to turn itself into a company that is already dead.


I think that the rest of the year will be a very good one for stocks, not 6% a month good, but good nonetheless. However, the stocks I mentioned above all are likely to underperform significantly given the shortcomings in their business models.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.