Value Traps? 5 Stocks Near Lows With Rising Inventories

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Includes: FSLR, MYL, SON, URBN, X
by: Kapitall

With the market downturn continuing, there's bound to be some bargain hunters out there. With this is mind, we wanted to see if we could spot potential value traps to avoid during this time.

To create the list, we started with a universe of 200 stocks trading near lows (only focusing on the largest companies by market cap, trading near 52-week lows).

From this universe, we collected data on inventory levels, and identified a list of companies that have seen inventories rise faster than revenue during the most recent quarter.

This signal may mean many things--maybe the company is preparing for an upswing in demand, or perhaps it is having trouble selling its products.

To provide clarity on the interpretation, we collected data on short seller trends, and identified which of the names have seen a significant increase in shares shorted over the last month (i.e. short sellers increased their bets that these stocks will trade lower)

The final list of 5 is below. Use it as a starting point for your own analysis.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

Short sellers seem to think these stocks are value traps. There may be many reasons for this opinion, and we've managed to identify bloated inventories as a possible explanation.

Why do you think short sellers regard these names are value traps? Leave your comments below.

List sorted by market cap.

1. Mylan, Inc. (NASDAQ:MYL): Engages in the development, manufacture, marketing, licensing, and distribution of generic and branded generic pharmaceuticals, specialty pharmaceuticals, and active pharmaceutical ingredients (APIs) worldwide. Shares shorted have increased from 29.33M to 34.36M over the last month, an increase that represents about 1.19% of the company's float of 424.37M shares. Revenue grew by 15.0% during the most recent quarter ($1,573.88M vs. $1,368.54M year/year). Inventory grew by 28.51% during the same time period ($1,408.96M vs. $1,096.37M y/y). Inventory, as a percentage of current assets, increased from 30.21% to 37.48% during the most recent quarter (comparing 3 months ending 2011-06-30 with 3 months ending 2010-06-30).

2. First Solar, Inc. (NASDAQ:FSLR): First Solar, Inc. manufactures and sells solar modules using a thin-film semiconductor technology. Shares shorted have increased from 17.06M to 18.85M over the last month, an increase that represents about 3.01% of the company's float of 59.51M shares. Revenue grew by -9.37% during the most recent quarter ($532.77M vs. $587.85M y/y). Inventory grew by 83.55% during the same time period ($356.65M vs. $194.31M y/y). Inventory, as a percentage of current assets, increased from 12.03% to 19.42% during the most recent quarter (comparing 3 months ending 2011-06-30 with 3 months ending 2010-06-26).

3. Urban Outfitters Inc. (NASDAQ:URBN): Operates lifestyle specialty retail stores under the Urban Outfitters, Anthropologie, Free People, Terrain, Leifsdottir, and BHLDN brands. Shares shorted have increased from 16.11M to 19.30M over the last month, an increase that represents about 3.06% of the company's float of 104.27M shares. Revenue grew by 10.33% during the most recent quarter ($609.18M vs. $552.16M y/y). Inventory grew by 24.65% during the same time period ($303.16M vs. $243.2M y/y). Inventory, as a percentage of current assets, increased from 25.26% to 43.4% during the most recent quarter (comparing 3 months ending 2011-07-31 with 3 months ending 2010-07-31).

4. United States Steel Corp. (NYSE:X): Produces and sells steel mill products in North America and Central Europe. Shares shorted have increased from 24.58M to 26.18M over the last month, an increase that represents about 1.12% of the company's float of 143.21M shares. Revenue grew by 9.38% during the most recent quarter ($5,120M vs. $4,681M y/y). Inventory grew by 34.1% during the same time period ($2,698M vs. $2,012M y/y). Inventory, as a percentage of current assets, increased from 34.64% to 44.81% during the most recent quarter (comparing 3 months ending 2011-06-30 with 3 months ending 2010-06-30).

5. Sonoco Products Co. (NYSE:SON): Provides industrial and consumer packaging products, and packaging services in North and South America, Europe, Australia, and Asia. Shares shorted have increased from 2.04M to 3.29M over the last month, an increase that represents about 1.28% of the company's float of 97.53M shares. Revenue grew by 11.66% during the most recent quarter ($1,127.87M vs. $1,010.12M y/y). Inventory grew by 22.89% during the same time period ($394.19M vs. $320.77M y/y). Inventory, as a percentage of current assets, increased from 29.22% to 31.65% during the most recent quarter (comparing 3 months ending 2011-07-03 with 3 months ending 2010-06-27).

*Short data sourced from Yahoo! Finance. Accounting data sourced from Google Finance. Data pulled October 3, 2011.


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