Bear of the Day: Six Flags (SIX)

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Six Flags Entertainment (SIX) has 17 amusement parks across the United States, and one each in Mexico and Canada, with world-class coasters, family rides for all ages, up-close animal encounters and thrilling water parks.

Word is that they also have new locations coming soon in Zhejiang, China, Dubai, UAE, and Riyadh, Saudi Arabia. And stealing a page from the book of Disney theme parks, Six Flags holds long-term licenses for Warner Bros. and DC Comics characters, including Bugs Bunny, Daffy Duck, Tweety Bird, Yosemite Sam, Batman, and Superman. Additionally, the company has certain rights to use the Hanna-Barbera and Cartoon Network characters, including Yogi Bear, Scooby-Doo, The Flintstones and others.

But when the company released Q3 results in late October, investors were disappointed enough to gap the stock down over 15% from $62 to $52.

Quarterly EPS of $2.16 per share missed the Zacks Consensus Estimate of $2.32 per share, and only represented year-over-year growth of 2.4% vs $2.11 last year at this time. These figures are adjusted for non-recurring items.

This showing represented a negative earnings surprise of -6.90%. A quarter ago, it was expected that the amusement park operator would post earnings of $0.93 per share when it actually produced earnings of $0.88, delivering a negative surprise of -5.38%.

Six Flags posted revenues of $619.82 million for the quarter ended September 2018, missing the Zacks Consensus Estimate by 2.09%. This compares to year-ago revenues of $580.42 million. The company has topped consensus revenue estimates three times over the last four quarters.

Six Flags Still a Short?

SIX belongs to the Zacks Leisure and Recreation Services industry, which currently ranks in the top third of all Zacks Industries.

The company also pays a generous dividend of $3.28, which currently represents a 6.46% yield.

This yield became richer on Christmas Eve when shares made a new 52-week low near $50.

On December 14, I identified the stock as a high-probability short candidate around $60 after shares had closed the Oct 23 gap down and put in a lower high. My first target was $52 (near the Oct lows) and my second target was $48, site of the 2017 lows.

So with that strong yield and 15-20% gains for short players since earnings, is it time for shorts to close the trade or do new lows suggest a trip to $48?

One key indicator may be the duration of the stock's time in the Zacks "penalty box." SIX first became a Zacks #4 Rank (Sell) in early October before their earnings report, as analysts were lowering EPS estimates into the quarterly report.

Then it slipped to the cellar of the Zacks Rank with a #5 Strong Sell rating after their report, as the analysts delivered a stronger verdict about the declining growth trajectory.

Now SIX is slowly climbing out of the cellar with a move back to a #4 Rank as older estimate revisions roll off of the model's calculation, which looks only at a 60-day window of analysts changes.

In fact, SIX could become a #3 Rank (Hold) soon as the negative revisions completely fall out of the short-term calculation. But two other factors are worth considering before assuming SIX could be a buy again.

First, to follow and stay in sync with the growth at Six Flags, one needs to do is keep your eyes on the accelerations and decelerations in EPS estimates. And one of the handiest ways to do that is with the Zacks Price & Consensus chart.

What you see below: on the left-hand scale are lines plotting the changes in annual earnings estimates against the stock price on the right-hand scale. The size of the green arrows indicates the magnitude of the earnings beat...

From this view, you can see that after 5 nearly years of steady growth during the heart of the economic expansion, Six Flags entered a period of sideways-to-lower growth into Q3 2018.

Clearly, growth has stalled, at least in the short run. But could this new pattern become a persistent trend? We can't answer that without studying the deeper fundamental trends of the Six Flags business.

But we can still rely on analyst estimate moves to give us a heads up about the business as that's where their fundamental analysis converts to the projected bottom line.

So our first and easiest task is to keep our eyes on the Zacks Rank, the single most powerful fundamental metric because it collects, crunches, and condenses the direction, magnitude, and agreement of earnings estimate revisions (EER).

And even before there is enough magnitude and agreement to move the Rank, you can watch the Detailed Estimates page where individual analyst moves will show up that might eventually kick it up or down.

Our second factor to consider is asking whether the economy is down-shifting significantly enough to impact consumer optimism and spending on entertainment.

While a true economic recession seems remote, the escalating trade war andcurrent stock marketvolatility could begin to impact confidence and spending trends.

We have only to look at consumer discretionary stocks like Target (TGT) and Amazon (AMZN) correcting 30% and 25% since their November highs to get an idea of the economic pessimism among investors.

Bottom line: Whether or not SIX is a good short now, using the Zacks Rank as a simple but powerful tool to scan for hundreds of prime shorting opportunities will only get more exciting and full of possibilities in this late stage of the economic cycle where all growth and trends are being called into question by analysts, mutual funds, and long/short hedge funds.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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