Four Short-Worthy Stocks
First of all, we aren’t telling anyone to short the company’s discussed within this analysis article.
This is just some food for thought during 13F season as it also introduces a topic that we’ve seldom mentioned in previous stock analysis articles.
So, shorting.
In short (am I right?), shorting is making a statement, and a bold one at that.
In specific relation to the stock market, shorting is betting against, or in other words, putting on a trade that would make you money if the underlying stock price decreased or went down in value.
One can do this a few different ways, including simply selling short a certain number of shares of a company or entity’s stock or by buying a put option on said stock and/or security and if you’re right, you can make out pretty handsomely in more cases than none.
If the value of said security goes down, you make money.
The harder the fall, the larger the profit for the short seller.
The 2008 Global Financial Crisis is Exhibit A, where practically a handful of investors made out with billions by betting against the housing market through a variety of different financial instruments and Black Wednesday is Exhibit B, where famed billionaire investor, George Soros, and his investment fund were charged (not literally) with breaking the Bank of England through its excessive shorting of the British pound (through the foreign exchange market), supposedly coming out with a one billion dollar profit in just one single day.
Imagine that.
Before moving any further, it is imperative that we mention that shorting and employing various instruments to short something is littered with underlying complexities that must be clearly understood by anyone even thinking about shorting anything, as if you’re wrong, you are potentially set to be wrong in a major way and if risk is not properly managed, you can end up owing a seriously scary amount of money.
All of this being said, why on earth would someone feel the urge to short some company?
One could feel compelled to short a company’s stock due to the shares simply being massively overvalued in their eyes (perhaps by referencing its present price-to-earnings ratio in relation to the company’s current, intrinsic value), rapidly declining positive market sentiment, impending threats of bankruptcy, cooked books (i.e., employing shady account practices to make numbers look better than they actually are), lackluster profitability prospects and a host of many other reasons.
Obviously, if one’s courage and action intersects with facts and aligned market sentiment, there is a lot of money to be made for those who are right and willing to put their money where their mouth is.
That being said, upon completing some of our own research, we’ve narrowed down four publicly traded companies that we deem worth considering shorting, for those who are interested in the subject matter.
1. MicroStrategy (NASDAQ: MSTR)
In short (pun shamelessly intended), MicroStrategy, aside from having one of the more generic business names out there, is a company with a focus on providing a variety of cloud-related applications and services that help companies find where they need to approve, through the analytics gathered through MicroStrategy’s software.
Nothing wrong with that.
Additionally, what makes this company particularly special is the fact that it has ownership of reportedly more than 100,000 bitcoins, the most out of any publicly traded company as of this writing, which seemingly makes sense given that one of the company’s founders and its current chief executive officer (CEO), Michael Saylor, is an avid proponent of the cryptocurrency and has thus blended this company’s current and future success prospects with a digital asset that tends to fluctuate quite dramatically.
Heck, it has happened already.
This is one of the reasons we think this is a stock worth shorting, as we are extraordinarily reluctant to invest in a company that opts to, instead of simple, historically dependable cash, hold bitcoin instead and rely on it staying above water day after day just to ensure that the company can live to stay in business for another day itself.
If we were current investors in the company’s stock, this would drive us absolutely crazy and frankly keep us up at night.
In addition to having a terrifying amount of bitcoin as its cash, MicroStrategy and its core business lies within a ridiculously competitive space (software as a service, better known as SaaS), which worries us in that upon looking at some of the company’s offerings, products and services, there really isn’t anything all that different from what better established SaaS platforms such as Salesforce, Oracle, Microsoft, Splunk, Datadog and trust us when we say a multitude of others that are currently in the process of taking and happily enjoying MicroStrategy’s lunch, with their more focused, data-intensive, differentiated, sleek, better proven services.
Oh, and they also have cash that doesn’t tend to fluctuate all that much, unlike, say, a cryptocurrency by the name of bitcoin.
From a strict core financials perspective, MicroStrategy’s balance sheet is already upside down (i.e., contains more total liabilities than total assets), its total annual revenues since 2018 (according to the income statement) have been stagnant whereas many of its competitors are growing exponentially on a year-over-year (YOY) basis, its net income has plummeted severely over the same time period, it has generated little cash from its operations during this time as well and to top it all off it appears to be far from being net profitable on a trailing twelve month (TTM) basis, according to the figures displayed on TD Ameritrade’s platform.
For all of these reasons, we are incredibly bearish on MicroStrategy and if bitcoin has a few bad days, short sellers would likely stand to gain plenty as this company continues decaying at a rate that isn’t nearly fast enough.
2. Beyond Meat (NASDAQ: BYND)
We’ve written about this company before.
While we stuck it with a “sell” rating, it might be more appropriate to now stick it with a “short sell” rating given that we don’t think this company has anywhere to go but down, likely on an accelerated path towards filing for Chapter 7 (i.e., going out of business, liquidation) bankruptcy.
Keep in mind, however, that we haven’t yet seen any formal rumblings regarding this being the case and it is just our opinion and estimation of what might end up happening as it pertains to Beyond Meat given what we have seen for ourselves in its business model and its numbers.
Briefly, Beyond Meat is a leader in the plant-based meat sector that sells a whole lot of plant-based products online and through its other channels such as its retail partners like Target, Walgreens, 7-Eleven, Walmart along with others as well as restaurant chains that have partnered with Beyond Meat and incorporated the company’s products into its own meals and food offerings.
While, as pointed out in our recently written stock analysis article on the company, we would’ve assumed this company had a very loyal customer following and thus consistently growing revenues throughout all stages of the recent booms and busts in the overall economic cycle, we were gravely disappointed to find that its base isn’t as loyal with their money as we had predicted.
Primarily, Beyond Meat’s total annual revenues experienced solid growth between 2018 and 2021 but then slumped to the downside in its most recently reported revenue figure (displayed on TD Ameritrade’s platform), reported in 2022.
If the plant-based crowd (which is very real, by the way) isn’t growing at an exponential rate and/or its die-hard fans become overwhelmingly price sensitive, which seems to have been the case between 2021 and 2022, this company is in a lot of trouble in our eyes.
And we mean a lot.
Specifically, this company’s per-unit profit margins aren’t going to be all that high to begin with as it needs to keep its prices low in order to compete in the plant-based meat and generic meat sectors as well as keep its retail partners happy by keeping its customers happy by, one might assume, keeping prices relatively low.
This is a major challenge and an indefinite headwind for a company like Beyond Meat.
It is also not encouraging in the slightest that this company has been losing money hand over fist over the last handful of years.
For instance, the company’s net income in 2020 stood at a somewhat modest -$53 million, however, it further extended its losses to -$182 million the following year, down all the way to its latest reported figure (again, displayed on TD Ameritrade’s platform) of -$366 million, in 2022.
Experiencing softness in revenue (in a rapidly expanding and growing industry, nevertheless) while bleeding cash doesn’t exactly scream “winning strategy.”
Like MicroStrategy, Beyond Meat’s TTM net profit margin is far off (to the downside) from the average of its respective industry peers, which also is far from a good sign.
Although this company’s stock (NASDAQ: BYND) has come down quite a bit already (falling nearly 90% during the time of this writing since its initial public offering, or IPO), we suspect it still has some coming down to do given its current financial strength, or really, lack thereof.
3. Carvana (NYSE: CVNA)
Honestly, we don’t want to spend a lot of time on this one.
This online used car retailer is just an absolute nightmare and if we were betting folks, we’d be willing to bet that this company completely folds within the next ten years, if it lives that long.
Carvana’s business is enormously sensitive to the economy overall and pretty much hasn’t a single shred of being recession resistant, it has allegedly sold stolen vehicles, it currently maintains an upside down balance sheet, its net income and total cash from operations since 2018 have both been deep in the red and so much more that doesn’t bode well for the company or any stage of its future.
The sad fact of the matter is that we actually don’t think the concept of buying and/or selling a car online is a bad idea, as in a very real sense, Carvana is a pioneer in this category. However, just because the concept is a good one doesn’t mean that it can sustain itself in a frothy car market, as completely and utterly evidenced by Carvana itself.
4. Wingstop (NASDAQ: WING)
This one is tragic since we are big fans of this company, its brand and its delicious offerings.
But, alas, we strive to be objective investors and this company just isn’t currently worth its weight in chicken wings right now.
It must be initially understood that casual dining restaurant chain, Dallas, Texas-based Wingstop is growing at a rapid rate, opening new stores across the globe on what can seem like a daily basis, which is far from a negative.
However, this company’s share price has gotten a way too ahead and frankly full of itself, as its present price-to-earnings ratio sits at a whopping 103.19 where it is commonly held that a price-to-earnings ratio of 20 implies that a company’s stock is trading at exactly fair value and anything higher indicates that it is overvalued.
To us, this is just a bubble waiting to pop.
Nonetheless, instead of being lazy and just basing this on a rather elevated P/E ratio, let’s briefly discuss some of the company’s core financials that lead us to think that this stock is due for a massive southbound correction.
For one thing, although the growth has been substantial in recent history, it isn’t likely to continue as more and more consumers tighten their wallets and cut back on discretionary spending, as Wingstop is one of the pricier fast-food chains.
Additionally, its total liabilities are just about double the amount of its total assets, which, as discussed in a recent similar stock analysis article regarding another growing restaurant chain, isn’t necessarily all that worrisome if deployed and managed properly, but Wingstop is still, from our perspective, riding a very thin line as its total assets stand at $424 million and its total liabilities tower over like a dark cloud at $815 million, according to TD Ameritrade’s platform.
This leaves essentially little to no room for error or financial cushion in the short-term, which is still inflation-filled and contractionary at best.
Nevertheless, we’ll concede that this company isn’t as bad as the other companies listed above in the sense that its total annual revenues have been growing at a brisk pace in recent years and its total cash from operations have been stellar and consistent since 2018 as well, not to mention the fact that the company’s TTM net profit margin is about 5% greater than that of the industry’s average, according to the figures shown on TD Ameritrade’s platform.
All this being the case, it is our opinion that Wingstop is, as also conceded by its current CEO, Michael Skipworth, an indulgence meal occasion for many and thus is different from, say, a McDonald’s, which is better hedged in the sense that it runs a more of a volume-oriented business model (given its pricing and enhanced convenience through its drive-thru and online delivery channels).
Therefore, if consumers overwhelmingly view Wingstop’s offerings as mere indulgences, as the state of the economy continues to weaken and their budgets continue tightening, they are far more likely to cook their own food at home or eat at a more low-cost, volume and value-oriented venue, such as one of many Wingstop’s competitors.
Thus, to us, the short and intermediate-term outlook for Wingstop is bleak and the bubble is likely to pop sooner rather than later, especially incorporating the fact that this company’s share price is largely hinged upon the prevailing price of chicken wings, which has drastically fluctuated in recent months.
Should you short these stocks?
We’re not telling you what to do at all.
We have our opinions and sometimes the numbers just happen to back them and, obviously, we like to write about these opinions.
It is essential that when it comes to any sort of investment or personal financial decision that one performs their own due diligence and makes these types of decisions on their own, rather than blindly following the crowd.
All things considered, these are some of the thoughts we have about some companies and why we think they are worthy of being shorted at this current moment in time.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.