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Stocks  | July 26, 2019

Investors shouldn’t take short sellers lightly. Whatever an investor’s opinion of short sales, short sellers usually are taking a contrarian opinion — and doing the work to back that opinion up. It makes sense for investors to pay attention because short sellers may be identifying prime stocks to sell.

Short sellers have to do their work thoroughly because short selling is a risky strategy. In theory (albeit not always in practice), short-selling losses can be unlimited. Crowded short trades can lead to a so-called short squeeze. Even without a squeeze, fees paid to borrow a stock can wind up erasing much, if not all, of the gains from the trade.

In other words, short-selling usually requires quite a bit of conviction. And for these 10 heavily shorted stocks, the conviction makes a bit of sense. All ten stocks have real risks and real bear cases. There are reasons why short sellers are looking to profit from the declines in these stocks and plenty of reasons these are stocks to sell if you own them already.

Bed Bath & Beyond (BBBY)

Bed Bath & Beyond (NASDAQ:BBBY) shares have been falling since the beginning of 2015, but short sellers have only targeted BBBY in earnest more recently. Just two years ago, short interest was below 10% of the float. It’s now, depending on the source, close to 40%.

Even some seemingly positive news hasn’t dissuaded BBBY bears. Fiscal third-quarter earnings in January beat estimates and sent the stock soaring. An activist effort in March drove more optimism and led to the resignation of Bed Bath & Beyond’s CEO earlier this month.

Each spike higher has been followed by yet another move down lower, however, and with good reason. Earnings are declining. Competition from Amazon.com (NASDAQ:AMZN) will only intensify. And as I wrote in March, it looks like the activists may be too late.

BBBY stock is fading again, trading back at levels seen before the activists’ stake was disclosed. There’s little reason at the moment to think that the multi-year downward trend will reverse. If you own BBBY, it’s a stock to sell.

National Beverage (FIZZ)

National Beverage (NASDAQ:FIZZ) shares soared earlier this decade on the back of growing demand for its LaCroix sparkling water. FIZZ shares started 2015 trading around $20; by the middle of 2017 they had reached $120. And now, they belong on this list

And somewhat ironically, it was short seller Glaucus Research in 2016 that initially brought attention to the stock. Volume had risen heading into Glaucus’ report, but it spiked even higher after the release and kept rising from there. With a flood of new buyers, FIZZ shares quickly reversed an initial decline and would triple in less than a year.

The optimism made sense. As I wrote just last year, National Beverage seemed a logical takeover target for Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP) as sparkling water growth threatened their legacy soda businesses. Impressive revenue growth drove a case for National Beverage as a standalone business as well.

But short sellers have returned of late, though the company’s thin float (only about one-quarter of shares outstanding) amplifies their size. And so far, the shorts have been right: FIZZ shares have fallen 42% in 2019

LaCroix’s growth has come to a screeching halt amid competition from Pepsi’s Bubly, Nestle (OTCMKTS:NSRGY) brand Ice Mountain and other private and private-label plays. A questionable lawsuit hurt the brand. Plans to expand into the convenience store, restaurant and international markets haven’t panned out.

As InvestorPlace’s Luke Lango pointed out in March, FIZZ stock is cheap. But with management apparently having little answer for rising competition, and sales headed in the wrong direction, it should be cheap. And unless something changes quickly, FIZZ is likely to get even cheaper.

J.C. Penney (JCP)

It’s no surprise that short sellers have targeted J.C. Penney (NYSE:JCP). Department stores are struggling, and the bear case for the group is that the struggles simply won’t come to an end. Online competition isn’t going anywhere. Mall traffic continues to decline. There are simply too many retailers and too many stores meaning some will fall by the wayside, with J.C. Penney potentially at the top of the list.

Here, too, the shorts are winning at the moment, with JCP near an all-time low. A 5.5% decline in same-store sales in Q1 sent JCP stock sliding. Weak results from peers like Nordstrom (NYSE:JWN) and Kohl’s (NYSE:KSS) only added to the negativity. I wrote in December that a turnaround seemed highly unlikely; results since do little to challenge that thesis.

Investors looking to time the bottom in JCP should remember that it’s not just short-sellers pressuring the stock – or pressuring the company. JCP makes our list of stocks to sell because the bond markets are pricing in a significant possibility of a restructuring. J.C. Penney’s bonds due November 2023 trade just over 50, and yield a staggering 27%. Both figures price in a significant likelihood that JCP will have to restructure before those bonds mature.

In that scenario, JCP stock almost certainly goes to zero. It’s precisely that outcome on which shorts are betting on, and J.C. Penney has done little so far to suggest that bet isn’t worth taking.

Eastman Kodak (KODK)

For the most part, investors have moved on from Eastman Kodak (NYSE:KODK). At the height of the cryptocurrency boom (or bubble) in early 2018, KODK shares soared upon the release of the company’s KodakCoin. At one point, Kodak stock tripled in a matter of a few sessions.

But the gains were short-lived. Crypto optimism faded. The company made no apparent progress made on KodakCoin. Investors abandoned the story, and as a result, KODK shares have continued to decline. They now trade well below levels seen before the huge gains of January 2018.

To be fair, there has been some decent news of late. The sale of the company’s Flexographic Packaging Division in April, along with a debt refinancing, have significantly improved Eastman Kodak’s balance sheet. But revenues continue to head in the wrong direction, and Eastman Kodak isn’t profitable even at the EBITDA line. As long as that continues, KODK shares are likely to keep dropping. This is a stock to sell.

Carvana (CVNA)

Like FIZZ, the short interest in Carvana (NYSE:CVNA) is amplified by a thin float. A little over one-fourth of shares outstanding actually trade.

Still, since its 2017 IPO, CVNA quickly has become a battleground stock. The bull case, as Luce Emerson detailed in April, is that Carvana is disrupting the auto industry. In 2014, the company sold a little over 2,000 cars. Four years later, the figure was over 94,000. Margins are improving. And the opportunity is enormous, with Carvana aiming at a dealership model that has changed little in recent years despite the technology-driven sea change seen in the rest of retail.

The bear case, however, is that Carvana basically is buying its growth. Margins are improving, but remain sharply negative. Longer term, there simply may not be enough profit dollars — ever — to support the infrastructure required to offer delivery, car vending machines, and other benefits to buyers.

The battleground has echoes of tech stocks like Netflix (NASDAQ:NFLX), where bears cite early-stage losses and bulls focus on the longer-term opportunity. But for Carvana, there are two concerns that support a more bearish interpretation.

First, scale isn’t nearly as beneficial: incremental revenue dollars from streaming customers, for instance, are enormously high-margin. That’s not necessarily true for the capital- and labor-intensive Carvana model. Secondly, CVNA is being valued as a tech play, trading at over 4x revenue. That seems too high, even if Carvana’s model is more successful than the most bearish scenarios predict.

The argument over CVNA is likely to go on for some time. From here, it looks like the bears have the stronger case, at least for now.

Boston Beer (SAM)

The case against Boston Beer (NYSE:SAM) as one of the top stocks to sell isn’t so much about the company. It’s about the industry. Craft beer demand has slowed — yet supply has increased exponentially. There are nearly double the number of breweries in the U.S. that there were just four years ago. That increase in options has allowed many pubs and retailers to focus heavily on local craft and provided intense competition for SAM’s flagship Samuel Adams Boston Lager.

Boston Beer has tried to respond by adding new products. Non-beer options now drive more than half the company’s revenue, as Dana Blankenhorn detailed last year. But it’s tough to argue that the strategy has been a roaring success: revenue in 2018 was just 3% higher than that of 2014, and net earnings declined over that period despite a lower tax rate.

Yet SAM stock has soared, recently touching an all-time high, and now trades at a whopping 34x 2020 EPS estimates. Given that other beer stocks like Anheuser-Busch InBev (NYSE:BUD) and smaller rival Craft Beer Alliance (NASDAQ:BREW) have crashed, those gains, and that multiple, both seem like too much.

To be fair, earnings have improved of late, and the market liked the acquisitionof Delaware’s Dogfish Head Brewery. But Boston Beer paid a peak price (based on per-barrel multiples) for Dogfish Head, and even some growth doesn’t look like enough to support the current price. It still looks like craft beer on the whole is headed for a reckoning – and at some point, the same will be true for SAM.

GoPro (GPRO)

Shares of action-camera manufacturer GoPro (NASDAQ:GPRO) are rallying again. The stock nearly touched an all-time low in December, but a stronger broad market brought in buyers looking for a turnaround. GPRO shares are near a one-month high.

And there has been some good news here. Q4 earnings were solid, and the company guided for profitability for full-year 2019, albeit on an adjusted basis. Paid subscriptions should add recurring and high-margin revenue and potentially a base to keep GoPro profitable going forward.

But as I wrote in April, it’s not clear what else GoPro can do from here to drive more growth. Gross margins look to be tapped out, based on management guidance. GoPro can’t take much market share; it essentially is the market. The company’s efforts to compete in the drone market never panned out.

Unless demand somehow accelerates — which seems unlikely — GoPro’s profits are likely to be flat, or worse. And even below $6, that’s not good enough. Past rallies always have faded,. The bet many are making against GPRO seems wise — and the pullback may already be on the way. This is a stock to sell if you own it.

Blue Apron (APRN)

The short case for meal kit provider Blue Apron (NYSE:APRN) is reasonably simple: the company’s business model simply doesn’t work. Certainly, public market investors have acted on that belief from the jump.

Blue Apron originally tried to price its 2017 IPO at $15 to $17, but wound up settling for just $10 per share. Even that price proved to be too high: APRN rallied only briefly before falling, and shares have declined almost without exception ever since.

Some shorts appear to have covered. But the short case here still holds. I wrote in late 2017 that APRN was likely headed to zero, and even some recent changes haven’t changed that opinion. The announcement of a new CEO in April drove some short-lived optimism, but the same thing happened in late 2017. In both cases, the gains were short-lived.

Blue Apron has slashed marketing expense in a bid to salvage profits: marketing expense declined over 60% year-over-year in Q1. The company did reach EBITDA profitability, but revenue dropped some 28% in the process. Blue Apron still needs to figure out a way to cut costs and grow revenue and that seems unlikely at best. The short case here remains what it’s been since 2017: APRN very well could head to zero, which means 100% returns on a short trade. Sell this stock if you don’t want to be on the wrong end of it.

Mattel (MAT)

Toy manufacturer Mattel (NASDAQ:MAT) has some positive attributes. Barbie and Hot Wheels may not be as popular as they once were, but both still drive enormous annual sales worldwide. Last year’s bankruptcy of Toys ‘R’ Us hurt revenue. But the company has room to adapt to new channels, including online sales. The company has even shown signs of life, with headline beats in both fourth quarter 2018 and first quarter 2019 results.

But the key problem for Mattel remains: a massive amount of debt. Mattel owes nearly $3 billion to creditors, yet Adjusted EBITDA over the past four quarters is just $330 million. That’s a 9x leverage ratio. A hugely concerning figure, and one that explains why the company’s long-dated debt trades at a substantial discount to par.

Mattel likely isn’t going bankrupt any time soon, admittedly. But the equity here still has a value of over $4 billion, and that figure can continue to come down unless the company somehow jumpstarts growth. Aggressive cost-cutting largely has been realized — which means the company needs to see sales rebound. It’s not likely to happen, and short sellers continue to bet that it won’t. If they’re right, MAT, which touched a 25-year low in December, has plenty of room to keep falling.

GameStop (GME)

Last on our list of stocks to sell has been a target for a while. Short sellers have had their sights set on video-game retailer GameStop (NYSE:GME) for years now. The thesis has been simple: direct digital downloads of video games will end GameStop’s business model. As Luke Lango put it on this site in April, GameStop will become the next Blockbuster Video, a chain decimated by technological shifts.

GameStop management has seen the shift coming and tried to pivot in response. Through acquisitions, it built out its Technology Brands division, comprised of Simply Mac stores reselling Apple (NASDAQ:AAPL) products and a Spring Mobile business that operated wireless stores for AT&T (NYSE:T). In its namesake stores, the company tried pushing more collectibles, a way to serve the existing customer base even if those customers were buying their games directly from developers.

The shift didn’t work. GameStop has sold off both its Technology Brands businesses. In-store sales turned negative last year and are guided to plunge 5-10% this year, guidance that led GME to crumble after Q4 earnings.

All that said, at this point GME might look like a dangerous short. The company closed Q1 with roughly $540 million in cash — a figure well above its current market capitalization. It’s maintained its dividend, which now yields a whopping 37%.

But there’s also nearly $1 billion in operating lease commitments on the books — and a real possibility that GameStop will spend that capital in an effort to keep itself alive in one form or another. Companies very rarely quietly wind themselves down — and short sellers are betting that GameStop won’t, either. As cheap as GME looks right now, it looks like a value trap.


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