Greenberg: 3 Stocks on New Short Fund's Radar
(This column previously appeared on Herb Greenberg's Reality Check)
SAN DIEGO (TheStreet
) -- Ask veteran short seller Andy Matthes what three stocks he think are unusually risky and, after thinking a second, he quickly names them: Family Dollar
(FDO - Get Report)
(FAST - Get Report)
(SYY - Get Report)
They're among several dozen stocks in the Teton Valley Fund, a new short-selling mutual fund he co-manages with short-selling analyst Gary Cooper.
Like the rest of fund's portfolio, these are big, liquid and, unlike so much of the focus in the short community, not shorts because they believe they're disasters in the making.
Instead, Matthes says they're "companies that go through the natural business cycle and have a hiccup. It doesn't make them bad people or bad companies."
But what it does, if Matthes' and Cooper's financial statement sleuthing is right, is make them ripe for a tumble.
Even in markets like this, which have been devastating for the shorts, stocks that somehow turn in unexpectedly bad or disappointing news do
Shorting, of course, has been an overall loser's game in recent years. In a note to investors, Matthes wrote: "With the S&P 500 up an average of 18.4% over the past 5 years it is hard to see the value of shorting ... or any hedge for that matter. "
The difference now, he says, is that interest rates and a few other variables "are squarely in the beneficial camp."
He's not alone in thinking that. I know of at least one short-only hedge fund that recently launched and Bill Fleckenstein -- who shut his short hedge fund several years ago -- has said he plans to launch a new fund soon. And Teton isn't the only short-only mutual fund. There are several others, as well as at least one actively-managed short ETF.
For all of them, the concept is generally to use the shorts as a hedge against a broader, generally long-biased portfolio, institutional or IRA.
"We're not a bear fund," Matthes says, "but a hedge fund that is not a hedge fund."
Which gets us back to Family Dollar, Fastenal and Sysco.
: "I'm not saying this one is terminal," Matthes says, "but it does have serious issues," including:
-- Dollar General is the best company in the space and it has lowered guidance.
-- Dollar General does $210 a square foot and Family Dollar does $180. "That's a huge disparity."
-- Negative same-store sales.
-- Wal-Mart is rumored to possibly be interested in Family Dollar. Assuming Wal-Mart wants in that space, Matthes says, "They won't buy the worst performer in hopes they can fix it."
-- "The Street is at $3.40 for Family Dollar. We think they'll be lucky to do $3. We think at most they're worth 15x earnings, which would put them at $48." The stock is now $61.
: As I told Matthes, this stock has steamrolled more short sellers over the years than almost any name I know. "For many years it traded at a high multiple and nothing was wrong with the business," he says. "Then it became a bet on the economy." What changed?
-- To jumpstart growth, the company started installing thousands of vending machines at customer sites.
-- Vending machines are reaching saturation.
-- The balance sheet is starting to show signs of stretch, on such items as inventory, accounts receivable and even prepaids (the latter always a magnet for short-sellers.) And all three are up greater than sales.
-- In an effort to improve customer service, 9% growth in staff vs. around 2% growth in stores.
-- Falling margins.
-- "The Street is at $1.68 for the year. We're at $1.60.That's not a huge disparity, but if you put a 22x on it you get $36." Stock is $49.
: Sysco is currently trying to get antitrust clearance to buy U.S. Foodservice, which could (at least temporarily) offset any current concerns by Matthes and Cooper. But "it's a pretty big statement about its current business," Matthes says. "If they do the deal our thesis gets put on hold," but then it becomes an acquisition-accounting story.
Among their concerns:
-- Sysco is a rollup, built through a string of acquisitions.
-- Casual dining, a large part of its business, has taken a tumble.
-- Operating margins are close to 4%. They're 1.5% at Berkshire Hathaway-owned The McLane Co., a direct competitor, which is likely more willing to sacrifice margins for cash flow. (People often forget that private competitors, or division of other companies, can often win by not having to play the public company game. Sysco concedes on its conference calls that margins are an issue.
-- "Volume growth is zero to 2% while profits are declining, SG&A is up and pricing is down. The return on invested capital has declined five percentage points over the past few years. Free cash flow doesn't cover dividends and buybacks, so they're borrowing money to give people a return. So the stock is trading at 20x" for meager revenue growth.
-- "The Street has them earning $1.80. We think they won't earn less, but the multiple will contract. We think it goes down to $27, which is a 15 multiple on a lower number."
: If I had the time to research all three the way I like to, they could all wind up on Reality Check with, in the very least, yellow flags. Memo to me: Get the time.
-- Written by Herb Greenberg in San Diego