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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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The New “Short 25” List, and Hedged Trades |
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Around the middle of the month, I update my quantitative model in order to find the worst stocks in the market - those being companies that aren’t very profitable, yet nonetheless trading at high valuations. For last month’s short list, the average return for the short list was 1.3% less than S&P 500, which is the benchmark for the model portfolio to beat. Although the results were mixed overall with winners and losers being equal, a few big losses from stocks like Sonus Networks (SONS) and Sapient (SAPE) helped the Short 25 portfolio beat the market. The new Short 25 list for the next month is: 1. Thoratec (THOR) One of the more interesting short plays I see here is Interpublic Group (IPG), an advertising firm that has been in business for more than a century. Interpublic offers a wide array of advertising services, and although well-crafted and targeted advertising is becoming a must in today’s short attention span world, I see many better ways to play that trend than IPG. Comparing the stock with other industry fellows, one can easily conclude that IPG trades at a large EBITDA valuation premium to WPP Group (WPPGY), Omnicom (OMC), and Publicis Groupe (PUB). This is despite the fact that IPG has a 1.3% net margin and a meager 4% return on equity, whereas net margins for the others range from 7.5% to 10% and RoE runs from 11.3% up to 25%. IPG also carries the highest debt-to-equity of those four companies while also having the highest PEG (above 2 on a forward basis), and its relatively small profits mean that it does not pay any dividends; the other stocks offer an average yield around 1.5%. With each stock trading in the middle of its 52-week range, I think either a straight short of IPG would be appropriate, as would a hedged trade with a short of IPG and a long position in WPPGY, OMC, or PUB. I’ve been negative on Playboy (PLA) for quite some time not just because of the terrible quantitative financial stats for the company, but also because (here is another hedged trade opportunity) I think fellow adult entertainment purveyor New Frontier (NOOF) has a leg up with its distibution model and the fact that the stock is dirt cheap. I’ve looked bad talking about NOOF before, as the company missed quarterly earnings by quite a bit and shares have run down to just $6 (down 30% in the last month). Still, the financial comparison between PLA and NOOF is striking; Playboy has a thin net margin of 2.5%, a 5% return on equity, a PEG of 4, a debt-to-equity of .68, and it trades at 19x operating cash flow and 18.4x EBITDA. Post-earnings, NOOF has 17% margins, a 14% RoE, a PEG of 1, no debt (cash makes up 15% of the share price), and trades for 7.6x operating cash flow and 4.5x EBITDA. If I was Hugh Hefner, I would leave the bunnies alone and put together a bid for NOOF. Ok, who am I kidding? One last idea to hit you with for today: As much as I like coal in the abstract and think it is highly underestimated as a future power source, I still don’t like where Peabody Energy (BTU) is in terms of valuation. I think that Alliance Resource (ARLP), a coal Master Limited Partnership (MLPs get special tax treatment), is the superior stock here. ARLP offers a 7.2% dividend and the financials on it are superior in many ways to that of Peabody, which I also believe could be on the short end of a shift in coal quality fundamentals. You can learn more about ARLP from the stock report I wrote a few months back. |