The only way to make money by shorting a stock is to find
potential land mines many investors may be missing. For wireless
services provider
Sprint (NYSE:
S
)
, short sellers have been focusing on two items: a looming legal
battle with New York State's Attorney General Eric T. Schneiderman,
and a debt-laden
balance sheet
that would be unable to support the company's ambitious
capital-spending program.
Yet as
I noted a month ago
, short-sellers have been looking quite vulnerable, as their most
dire concerns may not come to pass.
Shares
have risen 25% since then, and I see similar upside -- past
the $4 mark -- in the months ahead.
If I'm right, that would be a quick gain of about 30%.
The squeeze potential remains
In the last two weeks of May, the short interest in Sprint rose
by 8 million shares to 175 million, making this the second
most-heavily shorted stock on the New York Stock Exchange (behind
Bank of America (NYSE:
BAC
)
).
Since that short interest data was released, a pair of events
has emerged that should have these short-sellers pondering a move
to cover their short positions and those who want to buy this stock
seeing green.
First, Sprint has asked a judge to dismiss the lawsuit that was
brought by Schneiderman for supposedly failing to pay sales taxes
for the past seven years. The company claims the attorney general
has fundamentally misread the statutes regarding sales taxes.
Sprint claims the revenue it did not collect taxes on are
nontaxable, because they reflect interstate transactions.
I still don't know how this process will play out, but the odds
are rising that either Sprint will agree to a settlement at a lower
amount than short-sellers may be anticipating, or that Sprint will
prevail outright. This is a fluid situation, so it bears close
monitoring if you own this stock.
The second factor: Short sellers have suggested that Sprint
lacks the funds to complete its Network Vision program, a high-tech
network designed to enhance the voice quality and data speeds for
customers in the United States. As I wrote a month ago: "That
effort will require another $1 billion or so that the company
doesn't currently have. (Sprint hopes to secure 'vendor financing,'
which entails low upfront prices for base stations, chips, etc. and
payment streams down the road.)"
Well, at a series of investment meetings held in London in early
June, Sprint noted that vendors are playing ball. Ericsson, for
example, will provide up to $1 billion in upfront subsidies for
equipment purchases by Sprint. "Sprint considers itself 'fully
funded' for the whole of its Network Vision plan," Merrill Lynch's
analysts note, adding that with this risk reduced, they see shares
rising up to $4.50.
If they're right, then we're talking about a 50% gain.
There's even a third potential
catalyst
that could lead short sellers to cover their positions and send
this stock even higher. Sprint recently announced plans to
offer
the next iPhone without any subsidies to consumers who want to pay
up higher upfront prices for a phone in exchange for lower monthly
bills. Analysts at Guggenheim Securities say this could enable
Sprint to sell more than a million iPhones a year, making the
carrier a relevant player in the
Apple (Nasdaq:
AAPL
)
ecosystem.
Analysts at Citigroup are perhaps the most
bullish
of all, deploying a $6
price target
, or nearly 100% upside from current levels. They come up with that
target by triangulating discounted cash flows, price-to-free-cash
flow and
enterprise value
to
EBITDA
. They note that Sprint has "shown significant (operational)
improvement over the last two years." They add that margins will
likely rise steadily higher once the company's Network Vision
upgrade is complete.
Risks to Consider:
If the U.S.
economy
slips into
recession
, then consumers will increasingly gravitate toward lower-cost
pricing plans that
yield
smaller margins for Sprint and its rivals. Also, the New York state
lawsuit will need to be settled or dismissed before this stock can
post further gains.
Action to Take -->
Sprint isn't quite the picture of health just yet:
Verizon (NYSE:
VZ
)
is clearly still a superior operator. But Sprint appears to be
making the right moves to eventually boost its reputation among
consumers and its
market share
in this highly competitive business. Short sellers have been
focusing on a troubled company, but they need to update that view.
And investors who are willing to bet against them could win
big.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.