Is it Shorts Season Yet?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For the most part I spend my free time looking at really great companies that can produce great long term returns. I get really interested when I find a great company that is selling for a great price which of course rarely happens. Usually what happens is that the great company is selling for a fair price. As I dig deeper into great companies I always take a look at their competitors and every now and again I’ll find a company that’s pretty bad and that’s selling at much too high a price given its prospects. Not one to turn down a potentially profitable situation, there are times where shorting a company could turn into a nice short term return. I have three companies on my short list that as the weather starts to heat up, has me wondering if it might be time for some shorts?
When I am looking for a company to buy I’m looking for one that has a competitive advantage, a clear business model and solid prospects for growth. More often than not, that company that I am buying has disrupted the business model of one of their competitors and is knocking them around in the marketplace. Of late Microsoft’s investments in the living room have begun to pay off with the success of their Xbox with Kinect. Their intellectual property vault and cash vault give them a tremendous advantage in the marketplace. Unfortunately for Sony (NYSE: SNE), Microsoft’s gain is coming at the expense of their PlayStation. Even more unfortunate, that’s not the only headwind they are facing as they are being hit on many fronts as TV margins compress, their music business is being squeezed and they just are not competing on the coolness side of the tech gadget marketplace. As a result they are in the process of issuing massive layoffs as they try to right size. The business has been losing money for the past few years. I’m not sure Sony is anywhere near turning around their business and I think they have plenty of room to the downside as competitive pressures mount.
Another example of a company that is increasingly on the losing end is Research in Motion (NASDAQ: BBRY) in their battle with Apple (NASDAQ: AAPL) and a host of others in the smartphone market. RIMM once dominated the business marketplace with their BlackBerry phones but wide scale system outages and market share losses from the hipper iPhone has just been crushing RIMM. Apple might not have the best product in the marketplace but they do have the one that everyone wants which is making carriers very willing to heavily subsidize so that in a marketplace as competitive as the smartphone market its giving Apple the upper hand over RIMM. There might still be value in RIMM, but at this point the stock might be nothing more than a value trap. Their only rescue might be by going the route of Palm and selling out.
There are times that a company disrupts an industry without even trying. When it comes to the online job search market, Monster Worldwide (NYSE: MWW) just might be the one that gets devoured. Social networking site LinkedIn (NYSE: LNKD) started to connect business professionals, but human resources professionals and recruiters have found it a treasure trove of data on potential job candidates. With over 150 million users who are posting their work history, projects and connections, recruiters can learn much more about a potential candidate than ever before because most users are not actively looking for a job but instead just trying to network in their field. Monster meanwhile seems to be fighting a tough job market and more widespread usage of LinkedIn by their core customer. There might still be some value in the franchise, but as I said in my red thumb in Motley Fool Caps, “They either get acquired or go out of business. My bet is going out of business as LinkedIn's social aspect is driving [human resource] professionals away from Monster and others like them." I need to dig a little deeper before I put some real dollars behind that call, but I don’t think this one will come back to bite me.
Shorting companies can be much more risky than the average investor is willing to take on. If nothing else, looking at which companies that might make good shorts does make you think twice about risks to the bull case on companies you are buying. It takes two to make a market and there is almost always a bullish argument to consider. Do you have a bull case that could throw some cold water on these short candidates? What about your short list, which company do you think is destined to take a dive this summer? I’d love to hear your comments below.
latimerburned owns shares of LinkedIn and Apple and has a bull call spread on Apple and Microsoft, a synthetic covered call on Microsoft and a bear call spread on Sony. The Motley Fool owns shares of Apple, LinkedIn, and Microsoft and has the following options: long JAN 2013 $22.00 calls on Sony (ADR) and short JAN 2013 $5.00 calls on Sony (ADR). Motley Fool newsletter services recommend Apple, LinkedIn, and Microsoft. 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.