Even Wrapped Up, Some Stocks Aren't Gifts

The new year doesn't look cheery for Juniper or Estee Lauder, short-sellers say.
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SAN FRANCISCO -- With many Wall Street professionals looking to wrap things up ahead of the long holiday weekend, if not for the year, today seemed an appropriate day to wrap up some of this column's own loose ends (no pun intended).

Loose End No. 1

After falling 18% Thursday following its steep profit warning, shares of

Juniper

(JNPR) - Get Report

rebounded 6.1% to $19.98 today.

Nortel's

(NT)

announcement that

it expects a narrower-than-expected loss gave a boost to Juniper and the entire beleaguered telecom-equipment space.

But Ike Iossif, president of Aegean Capital in Chino Hills, Calif., sees "no reason to cover" the Juniper short

mentioned here Wednesday because his target is $10 to $12.

Merrill Lynch declared Juniper's shortfall to be "company specific" and cautioned investors "not to draw industrywide conclusions."

But Iossif argued the contrary: "Every buyer of networking gear has announced plans to either increase

spending cuts, or stick with the same spending cuts they have announced for 2002," he noted, offering little sympathy for those surprised by Juniper's warning.

Sprint

, for example, on Dec. 4 announced plans to cut its capital spending to $3.5 billion for 2002 from an estimated $5.4 billion for 2001. More recently,

Qwest

cut its capital-spending plans for 2002 to between $4.2 billion and $4.3 billion from $5.5 billion.

By coincidence, Iossif recalled, Dec. 4 was the very day

Cisco

(CSCO) - Get Report

CEO John Chambers issued some cautiously optimistic comments.

"Their respective CEOs can pound the table all day long claiming that they see bottom,

but if the buyers of networking gear are still planning to buy less, where is the turnaround going to come from for Cisco, Juniper and

Ciena

(CIEN) - Get Report

?" the fund manager mused. "My problem is they are the same

CEOs who at the top could see nothing but perpetual 50% to 100% year-over-year growth."

Iossif found little solace for Juniper in Nortel's announcement either, noting the narrower-than-expected loss was due to restructuring rather than improving business conditions. Additionally, Nortel now expects fourth-quarter revenue of $3.4 billion vs. prior projections of $3.54 billion, and the firm reduced its available credit line to about $1.58 billion from $2 billion. "Not exactly stellar news," he quipped.

In addition to Juniper, Aegean Capital maintains a short position in Ciena. The fund has no current positions in Cisco or Nortel.

Loose End No. 2

As Iossif is to Juniper, Aaron Edelheit of Sabre Value Management is to

Estee Lauder

(EL) - Get Report

, which he mentioned being short here on

Nov. 28.

On Wednesday, Estee Lauder cut its forecast for second-quarter earnings to 35 cents to 37 cents a share, vs. prior guidance of 49 cents to 52 cents.

The company attributed the shortfall to "substantial inventory de-stocking" by retailers, suggesting consumers are buying its products at a 5% faster rate than retailers are buying from Estee Lauder.

"I don't know if I believe that," commented Linda Bolton Weiser of Fahnestock & Co. "Why, if retailers are seeing cosmetic sales still up in midsingle digits, why would they be continuing to reduce inventory?"

In its press release, the company said it's the "very conservative stance" being taken by retailers, but Edelheit suggested channel-stuffing by the company in anticipation of the holiday shopping season.

"If retailers' sales were still strong, there would be no reason to de-stock," he said in an email. "The problem probably lies in the fact that Estee Lauder has too much inventory on its hands -- over 200 days, in fact. They still have no growth in their core business and this is the second warning in three months, and we have no guidance going forward."

The most vexing thing for Edelheit is that despite its latest shortfall, Estee Lauder shares ended the week just 13 cents below their close of $31.99 on the eve of the profit warning. The stock rose 2.8% Friday.

Nothing is more frustrating for short-sellers than being

right

about problems in a company's fundamental story, but having the stock say otherwise. This gets to the art of money management vs. the science.

Another hedge fund manager, who specializes in retail stocks but has no position in Estee Lauder, agreed the cosmetics giant "has a lot of problems." But it is "probably OK relative to the price of the stock," he argued.

The key for Estee Lauder, the stock, going forward is whether that days-of-inventory figure is going to stay the same, increase or decrease, said the source, who requested anonymity. "If inventories work down, you will see shorts covering long before the turn in earnings."

The company certainly wants investors to think in-house inventories will be declining. "With historically low inventory levels at retail, we are well positioned when the economy begins to show signs of improvement and the sentiment of retailers improves," CEO Fred Langhammer commented in the firm's press release Wednesday.

But Edelheit is undeterred by all the "what ifs" and "could bes" for Estee Lauder, calling it "another example of a 1990s growth company -- i.e.,

Coca-Cola

(KO) - Get Report

,

McDonald's

(MCD) - Get Report

and

Gillette

(G) - Get Report

-- that has grown its way to such huge market share that it can't possibly take anymore."

The real question, Edelheit said, is: "What do you pay for a company with no sales growth prospects, with too much inventory and falling earnings?"

Answering his own question, the fund manager suggested $18 to $23 a share.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.