3 Free Falling Stocks To Short

By Karen Rogers - September 24, 2012 | Tickers: HGG, P, SVU | 0 Comments

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When a company is unable to turn itself around and hits that point of no return, investors can ride the stock down and make some nice profits.  Those with an appetite for thrills will sell the stock short or, for a more conservative play, buy option puts to contain the risk.

Despite operating 212 stores in 17 states, hhgregg’s (NYSE: HGG) operating income is the same as it was five years ago.  Same-store sales continued to slide, falling 0.7% last quarter and another 5.1% this quarter.  In addition to competing with similar firms like Best Buy, the company is losing ground to discounters like Wal-Mart and online retailers like Amazon.com.   Management recently affirmed their earnings downgrade for 2013, now pegged between 90 cents to $1.05 per share instead of their prior estimate of $1.12 to $1.27.

Hhgregg’s new stores have not increased company revenue but are adding to their expenses.  Revenue continues to slide quarter over quarter and the company posted a net loss of -$5.7 million for 2Q 2012.  Management’s inability to capitalize on store growth or stop the decline in revenue and net income continues to make hhgregg an attractive short candidate.    

Supervalu’s (NYSE: SVU) stock price has tumbled 72% this year and shows no sign of stopping.  The company has posted three straight years of revenue declines as it continues to give ground to grocery discounters Wal-Mart and Sam’s Club, dollar stores, and rival chains like Publix and Kroger.  The company announced they would be closing 27 Albertsons stores and 22 Save-A-Lot stores, and continues firing employees and cutting food prices in an effort to remain in operation.

Supervalu was able to post 2Q 2012 positive net income through aggressive cost cutting measures, which is exactly what makes this an excellent stock to short.  Supervalu can only fire so many employees, and a store can only be closed or sold one time.  Once that cash is spent, there’s nothing to stop the company from resuming its downward spiral.

At present, Supervalu management has suspended dividend payments and hired Goldman Sachs to review their strategic alternatives.

Pandora Media’s (NYSE: P) popularity has put it right in Apple’s crosshairs.  The streaming music company reported better than expected results on higher advertising revenue as more people listened to music on their mobile devices. This announcement was sure to catch Apple’s attention as the tech giant looks to further increase their iOS market share.

Although Pandora’s listener hours are up 80 percent year over year and is grabbing a larger market share, the company is still losing money due to the high royalty costs they must pay for streaming music.  The company already competes against Sirius, Spotify and Clear Channel, and may soon have to add Apple to that list.  Competing against Apple is a bet Pandora will lose; Apple can afford to subsidize a streaming music business that loses money indefinitely; Pandora cannot, and that’s what makes Pandora an excellent company to short. 

It also doesn’t help Pandora’s chances for survival that the company has yet to earn a profit and is dipping into its coffers to make up the shortfall.

The chart below offers an analysis of each company’s current financial status.

Watching good companies fall into financial ruin isn’t easy but it can be an opportunity for investors looking to capitalize on the situation.  Through option puts or short selling, investors can potentially profit from these companies' decline.

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