5 Companies Falling Without a Parachute
Karen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Companies married to business models that don’t work may find themselves trapped in a downward spiral from which there’s no escape. Add that to the current economic and financial climate, and sellers may find themselves having trouble deciding which shorting opportunity to select.
GameStop (NYSE: GME) has become this decade’s Blockbuster. With over 4,500 outlets in the U.S. alone, this brick-and-mortar business centers on buying and selling new and used video games, consoles and accessories. It worked fine until gaming became serious about digital, a move which tore up GameStop’s playbook. Now the firm finds itself competing against Apple’s and Android’s extensive game selections as well as the online games that are either free or available at very low cost.
GameStop’s reported second quarter 2012 net income fell 23%. Earnings came in at $30.9 million compared to $40.3 million earned the same quarter a year ago. The company also lowered its growth outlook from 1% to 3% instead of the original 3.5% to 5.5% estimate. The stock, currently trading around $17-$18, continues to hit new lows and is ripe for shorting.
There’s not a lot to say about Radio Shack (NYSE: RSH) that hasn’t already been said. The business model broke years ago, top management has no idea what they’re doing, the stock price continues to slide and the financials are terrible. As of June 30th, the company had cash of $517.70 million, debt of $679.30 million, and the short percentage of the float stands at 46%.
Radio Shack’s stock price closed at $3.03 this past Friday and presents an excellent opportunity for a put option spread or a ratio spread. Other investors may just sell the stock short in anticipation of a further drop in price.
Best Buy (NYSE: BBY) is an interesting company to be on this list. On one hand, founder Richard Schultz is offering a buyout of $24 - $26 per share to take the company private in a debt and equity buyout worth about $8.84 billion. On the other hand, the company posted record revenue of $50.7 billion, has an operating cash flow of $3.29 billion and pays regular dividends at a current yield of 3.50%. In the face of a difficult economy and against fierce rivals that include Apple, Wal-Mart and Amazon, Best Buy still came in with 7.1% growth in revenue. Possible options strategies would include a credit iron condor spread, a bull put spread or bear call spread depending on the investor’s belief of where the stock is heading.
Groupon (NASDAQ: GRPN) and Facebook (NASDAQ: FB) might as well be brothers. Both are trading at new lows from their wildly-hyped IPO opening day prices, both are seeing major defections in management and sales personnel, and neither one can come up with a business model that works. After Groupon’s lockup period expired, the short selling volume was so heavy exchange circuit breakers tripped and halted further shorting. Based on Facebook’s botched IPO, falling stock price and awful first quarter earnings report, there’s every reason to expect Facebook’s stock to do the same when their lockup expires. Both stocks have lots of room for short sellers to cash in on the continuing fall.
Short selling isn’t for everyone and investors must determine their own risk tolerance. Investors who do short may reap substantial profit from companies in a heated competition to see which one can hit bottom first.
kprogers has no positions in the stocks mentioned above. The Motley Fool owns shares of Best Buy, Facebook, GameStop, and RadioShack. Motley Fool newsletter services recommend Facebook. 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.