showing no clear direction at this point, it pays to stay focused
on long and short ideas for your portfolio. In recent weeks, I've
been trying to generate more short-oriented ideas for readers, and
it pays to stay abreast of these picks even more closely than your
longs. (Even more important, if you own any of the stocks I've
identified as shorting opportunities, you should take a long and
hard look -- and consider selling.) The rationale behind a short
idea can change very quickly, while long-oriented ideas can often
take a year or two to reach fruition.
With this in mind, here's a fresh look at three stocks I've
recently panned. With third-quarter results now in the bag, do the
respective investment theses still hold up?
1. Clearwire (Nasdaq: CLWR)
I issued a dire forecast for this stock
roughly a month ago
, suggesting the stock might eventually go to zero.
A fast-dying relationship with
, a key investor, likely spelled real hardship as Clearwire seeks
to raise another $1 billion to help complete its 4G wireless
network. The loss of sales leads generated by Sprint also looked to
create havoc on the
(For a fuller explanation of Clearwire's challenged
, be sure to
read my original analysis here
Well, the on-again-off-again relationship with Sprint may be back
on (the two parties are in discussions), and this stock has
rebounded more than $0.50 since I recommended shorting it. Still,
the long-term challenges remain, so I still expect this stock to
fall well below $1 by the end of 2012, though an actual move to
zero may now be less likely, since bankruptcy may be averted.
For starters, Clearwire was able to maintain its impressive
momentum in the last quarter, even as the Sprint relationship was
starting to crumble. The company added 1.9 million net new
subscribers -- a 29% sequential jump. The current subscriber base
will be reasonably sticky, providing Clearwire with a base of
recurring revenue while it scrambles to find new partners. (The
total tally is likely to exceed 10 million subscribers by the end
of this year). Still, this business model is not quite big enough
yet to be self-funding: Clearwire posted an
loss of $46 million in the third quarter.
And as noted in the past, Clearwire hasn't been able to complete
the full development of its network, and its financial woes may
keep this from ever happening. The company just announced plans to
reduce its 2011 capital budget by $100 million, and unless it can
raise more money,
may grind to a halt in the first half of2012. Meanwhile, wireless
service providers such as
continue to pour heavy investments into their 4G networks. Any
early lead that Clearwire created is quickly evaporating.
In the quarterly press release, management tacitly admitted that an
inability to raise more money could imperil the business model: "We
are not able to update our guidance on our funding needs and our
ability to generate positive EBITDA at this time." Translation:
potential investors aren't knocking down our doors to provide us
with more capital, and until that happens, we're hard-pressed to
forecast how the business will fare in 2012 and beyond. In my view,
Clearwire will survive and receive more capital infusions, but at
prices far below the current level.
2. Eastman Kodak (
The outlook remains equally dire for this former "Nifty 50" stock,
as I first noted
have fallen more than 20% since then and have a lot more room to
fall, if just-released quarterly results are any guide.
Third-quarter sales fell 17% (though only 5% if a major royalty
payment from a year ago is excluded from comparisons). More
important, another $200 million flew out the door this quarter, and
unless it can line up a buyer for its patent portfolio, the company
may be hard-pressed to survive into next summer without declaring
Cash has dropped from $1.6 billion at the end of 2010 to a recent
$862 million -- a trajectory that is clearly unsustainable for a
company with $673 million due as the current portion of its
, $1.36 billion in other long-term debt, and $2.5 billion in
underfunded pension liabilities. With each passing month,
bankruptcy looks like the wiseroption -- unless Kodak can sell off
its patents. Even if this happens, the remaining core businesses
are of uncertain value, especially in light of the company's nearly
position. If you're short this stock, then it looks like the smart
play is to stay the course.
3. LinkedIn (Nasdaq: LNKD)
Unlike Clearwire and Eastman Kodak, this isn't a business in
trouble. Instead, its stock simply looks quite
. As I wrote
in late September
, "This is a company worth $7.3 billion, but with just $121 million
in sales and $5 million in profits in its most recent quarter. Of
course, the company is growing very quickly and investors are
counting on strong growth to continue for an extended period."
What do just-released quarterly results tell us? Well, as expected,
LinkedIn is still growing at a fast pace -- for now. Third-quarter
sales rose roughly 15% sequentially to $140 million, ahead of the
$127 million consensus forecast. Frankly, that consensus forecast
looked awfully conservative in light of recent quarter-over-quarter
gains, and the stock rightly fell about $5 in
. (A subsequent announcement that the company would issue new
shares in a planned $100 million offering pushed shares down even
further.) The stock is now roughly flat since the time I
recommended shorting it (while the S&P 500 has risen almost 10%
in that time frame).
Where to from here? I still suspect that there's a lot more
downside than upside in this stock, beginning the minute investors
start to see that double-digit sequential sales gains can't be
maintained. By a variety of metrics, LinkedIn grew roughly 50% to
65% from this time last year. (Membership grew 63%, while page
views rose 51%.) That works out to a low-teens rate on a
quarter-over-quarter basis. Better
helped sales grow at almost twice that pace, but you can't assume
continued higher monetization and instead need to think of this
business model in terms of those membership metrics.
All of this is not meant to imply that there is anything wrong with
the LinkedIn business model. It's a solid and sustainable growth
platform. It's just that the $8 billion
anticipates more growth than the company can reasonably deliver. In
my analysis in late September, I noted that 25% annual sales growth
(beginning in 2013) and 40% annual
earnings per share (
growth still only yielded $1.86 billion in sales and $1.34 in
by 2016. Let's assume that's too conservative and sales reach $2.2
billion and EPS hits $2. At around $80, or 40 times what 2016 EPS
might look like, this stock remains too richly valued and should
remain in focus for short-sellers.
Risks to Consider:
Clearwire and Eastman Kodak may still manage to secure a
financial lifeline and their stocks would quickly rally on such
news. So these are high-risk shorts. LinkedIn represents less risk,
as the stock can move up a bit from current levels, but still looks
poised for a steady downdraft as long-term growth assumptions start
to get dialed down.
Action to Take -->
Peppering in these short plays amidst an otherwise long-oriented
portfolio can help protect you from a renewed bout of market
weakness. Any one of these stocks looks like a suitable short from
where I sit.
would prove especially perilous for Eastman Kodak and Clearwire as
these companies remain unprofitable and will surely need further
injections of capital. LinkedIn, on the other hand, is simply too
richly-valued based on its current growth trajectory.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.