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SBAC: Joining the Shorts

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SBAC Communications (SBAC) is one of those unique stocks that somehow manages to defy gravity as it continues to lack positive earnings per share. It happens quarter after quarter, year after year. However, fund managers for some reason love SBAC as they use other peoples' money to invest in it. Why they do so is the question begged.

One answer might be that SBAC will reform into a REIT. American Tower (AMT), SBAC's much larger competitor recently did transform itself into a REIT. Morphing your company from a growth stock that does not produce net earnings per share into a REIT that will attempt to pay most of its earnings in the form of a dividend at the detriment to growth is a double-edged sword. One edge of the sword can be positive if the return on the investment is worth the risk. The other edge of that sword can be a negative, even if the company can pay a dividend. That is because once a "growth" stock morphs itself into a REIT the stock quickly trades similar to any stock trading based on its current return. And should interest rates rise, investors will demand to be paid a higher current return on their investment.

Earnings per share (well, losses) are improving if analysts for SBAC are to be found accurate. In fact the loss per share this year should be $0.44, compared to the loss of $1.51 per share in fiscal year 2012 (ending in December). For fiscal 2014 SBAC might even finally show a profit per share.

SBAC's balance sheet shows little cash on hand ($126 million) relative to their total debt ($5.4 billion). Thus, should anything go wrong for their growth story the stock would have a serious problem.

Technically, I have SBAC possibly readying to roll over. The stock rejected the $80 level hit in mid-May. The RSI suggests upside resistance, however the slow stochastic is still moving upward. But fundamentals in the end trump the technicals, as the technicals play catch up to better or worsening fundamentals.

SBAC has basically doubled in price in less than two years. Why that is so bends the minds of those who have shorted the stock. While the shorts had my sympathy they did not have my vote--until now.

This trade is one with high risk. because the trade set up is an aggressive and proactive. The dollar risk however is 100% controlled and relatively small (one point). Thus, the reward potential is high.

Trade: Buy to open 3 SBAC January 70 puts for $2.10 and Sell to open 3 SBAC January 65 puts at $1.10.

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