Look before you invest
Abir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investors are the real backbone of the company. They take the risks and therefore expect a good return from the company. Every investor wants value for their hard earned money at the end of the day. So before investing, one must get associated with the company in which he is interested. One must go through every detail, past records, future plans as well as the prospects of the company properly otherwise, investing will not fetch enough return. There are three companies in the market which represent solid shorting opportunities although, each of them has experienced a very strong run-up in the stock price. Pure speculation is driving the stock price of these companies, and investors would prepare to shortlist on the basis of fundamental downtrend. Let us study about these companies in detail.
General Growth Properties (NYSE: GGP), through its subsidiaries and affiliates, operates, manages, develops, and acquires retail and other rental properties, regional malls, which are located throughout the United States. It is a real estate investment trust (REIT) whose stock price has risen nearly 40% and it had a nice year. Because of this rise in share price, market capital increased by nearly $8 billion. This rise in price came after a long time and investors started to believe that the worst days are gone.
To judge the company we are going to focus on three main points such as return on assets, return on equity, and the market capitalization of the firm. Return on asset means how much profit is being earned by utilizing the assets. This helps to measure the effectiveness of the firm. Return on equity is the ability of the management to generate revenue by using shareholders’ fund. Market capitalization is the value that the market assigns to the firm based upon share price and shares outstanding.
From late 2007, the firm is in fundamental decline and is experiencing negative returns on assets and equity. This means that the firm is losing its position for every dollar or equity it possesses. These losses are being responded by the market by valuing the organization appropriately lower. The return rates of the firm closely correlate to the market value of the firm. The return began suffering from 2007, and the company is also shedding its market value since then. Many investors are still in a position to believe that the recent restructuring of the organization warrants will increase the share price despite of such a cold fundamental position.
Technically, the stock of this real estate investment trust is now in a strong uptrend which has propelled the stock to several year highs, but I, personally believe that investors are in the process of re-examining the long-term fundamentals of the company. Shorting GGP now is acceptable with a tight stop-loss at $21.50. But for more cautious investors a more conservative shorting entry is around $18 per share, or when the upward trend line is broken.
Prologis (NYSE: PLD), formerly AMB Property Corporation, is also a REIT. The Company is a global owner, operator, and developer of industrial real estate; focused on markets tied to global trade across the Americas, Europe, and Asia. It operates in two segments: Real Estate Operations, which includes its Capital Deployment activities, and Private Capital. The company has rallied over 15% this year which represents nearly a $3 billion increase in shareholder value over the past seven months, despite the fact that the fundamentals of this firm are very weak. The company uses $257 million per year in dividends, so, speculative investors have been rewarded with a 3% dividend yield on their investment.
On the basis of return on assets, return on equity, and the market capitalization of the firm; the company is unable to utilize the assets and shareholders’ investments properly to earn maximum profit for the past four years. The organization has earned profits only in five quarters of the past three years.
The company is in a situation of consistent loss and firm degradation, but still the shareholders have added $12 billion of market value to the firm in the past two years. To earn a return on its assets, PLD has been struggling for the past ten years. For every $100 of shareholders’ investment, the company has lost nearly $5 in net income for the past four years. I think shareholders have ignored these facts and are investing on a speculative basis.
PLD is now in a period of consolidation, and the price has failed to make new highs after the initial run up this year, which places the stock in a position of weakness. So tactical investors before sorting, should wait until prices try once again to attack the $36 per share boundary, and conservative investors should short on a break of the ascending trend line when per share goes to $32.
Liberty Global (NASDAQ: LBTYA), is an international provider of video, broadband Internet, and telephony services with broadband communications and/or direct-to-home satellite (DTH) operations. The company’s European and Chilean operations are conducted through its 99.6%-owned subsidiary Liberty Global Europe Holding BV (Liberty Global Europe). The firm has increased its share price nearly 36% this year. Shareholders have an additional value of $5 billion for this increase.
Strong relationship lies between return on assets, return on equity, and market capital. The firm is doing better operationally, and so its market assigns a higher value followed by an increased return but, suffering directly affects the returns and market capital. In late 2006, LBTYA suffered from a fundamental standpoint which gave a loss of money for two years constantly, and share price declined nearly 70%. In 2010, although the firm earned slight profits but the market response was very disproportionate with a stock rally of nearly 280%. In 2011, the company once again lost money but the stock’s price continued to rally. Perfect shorting opportunity can be represented by this difference in fundamental performance of the firm, and stock performance. The international video provider has continued the same performance that drove the share price to decrease 70% in previous years, yet the stock price has rallied in this instance. There is a great shorting opportunity for the active investors by observing the divergence between firm value and market value.
The stock is currently in an uptrend, and price has established new highs throughout the year. Traders could profit from shorting since, price seems to be making a pullback. $57 per share is for aggressive investors who are shorting immediately. If the price reaches this point, the definition of pullback will be violated by the stock, by making a new high. Conservative investors should wait until the price falls below the ascending trend line, that is around $50 per share.
If people want to trade with the shares of this trio, that is bought at a low price and selling them at higher after a few days or weeks then, they will be in a profitable position as I have said that their stock price, market capital is rising. But from the investor point of view, investors must not judge the company only by the rising share prices. As investment is a long run procedure, so investors who expect better return must give a thorough look in these companies before investing otherwise, return in the coming future may not be pocketful.
abirk has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.