Short Thoughts

As many of my readers know that I am short some stocks that I have written about on HypeZero:

With the market trending up the last couple of months, both Pandora and SHOS have skyrocketed costing me some money. However, Orchard has really tanked which has helped my short portfolio pretty much break even. Not bad in this market. 

I am keeping all three shorts as nothing fundamentally has changed from a business perspective at any of these three companies.

Because the market has gone up quite a bit, I am looking to add to my short portfolio. Here are some companies that have caught my eye as possible short candidates:

Zillow/Trulia

I have written that Zillow is better than Trulia based on sheer numbers. However, as I read more about this industry and these companies a couple of things concern me:

  • When I search for real estate in my area, I don’t use Zillow/Trulia because their information does not come from MLS so it is sometimes inaccurate or outdated. I use the realtor site run by Move Inc (MOVE).
  • I don’t see much of a difference between Move’s business plan and that of Zillow or Trulia. In fact, Move has better data.
  • Move has been around for a while and they have been struggling growing annual revenue past $200 million. Zillow is half the size at only $116 million in annual revenue, but worth 4+ times as much. As Zillow gets to Move’s size it will have similar growth problems.    
  • Sales and Marketing expenses are going up at a faster rate than revenue. If the market is so big and these companies have such a small percentage of the market size, why is it so hard to grow revenue? In 2012, Zillow revenue grew over 75+%, but sales and marketing grew over 100%. 2013 forecast calls for 45% revenue growth and 70% growth in sales and marketing expenses.
  • Both companies are trying to enter other markets by acquiring companies at premium prices. This is a big hint that the current business model does not justify the current valuation.
  • Zillow is barely profitable and Trulia is not profitable.

One thing that these companies have going for themselves is that the housing industry is bouncing back. This could result in real estate agents increasing their advertising spending on sites like Zillow. 

Moneygram (MGI)

I wrote that Wester Union is a value trap a couple of months back. Moneygram is Western Union’s biggest competitor, but it is smaller and does not enjoy Wester Union’s premium pricing. A couple of things concern me about this industry:

  • They charge the poorest people high prices to transfer small amount of money. Every year fees per transaction keep going down and there is constant pricing pressure. They need to increase the number of transactions per year just to keep revenue and profits from going down. Western Union, a huge cash cow, has been making $1 billion in profits for over 8 years.
  • Wester Union is performing price cuts across certain corridors and this should have an impact on Moneygram in 2013. 
  • New competitors (Xoom) and the wide adoption of smart phones will impact this industry in the future.

Monster/Dice

LinkedIn (LNKD) is hitting on all cylinders and the by-product of this that sites like Monster (MWW) and Dice (DHX) are hurting. Monster is at a 52 week low and I think Dice, a career website for technology professionals may be next. Even though the technology market is hot, Dice is barely growing revenue and profits. 

I will do more research on these companies before I short any of them.

Disclosure: I am short Pandora, Sears Hometown and Orchard Supply 

Revisiting Sears Spin-offs

I have written a couple of articles on the two Sears (SHLD) spin-offs, Orchard Supply Hardware (OSH) and Sears Hometown and Outlet (SHOS). I have received a lot of inquiry on what I thought of both of these companies after third quarter results came out. So, here is my analysis.

Orchard Supply Hardware

I am still short OSH. It has been one of my profitable investments this year. I shorted a little below $14 and covered around $8.50 before the third quarter results came out. Then I shorted again after the results at $7.30.

My original thesis still remains intact:

  • Small fish in a very competitive marketplace.
  • Still struggling to maintain financial covenants.
  • Unprofitable.

Third quarter results were horrible. Same store sales were essentially flat. However, margins were horrible even if you excluded the $72 million impairment charge. The company is not in compliance with its financial convenants and will not be in February, the next measurement date. 

The company is trying to turn it around by remodeling existing stores. However, this process is slow and a majority of the stores are still old.

The only thing that can save this company is the life in the housing economy. But as the third quarter results showed, this help has not been enough.

I plan to keep this short because I don’t believe this company has a future.

Sears Hometown and Outlet

I have a small short position in SHOS, but I am not as confident about this short as OSH. There are some good things about this company.

  • It is profitable.
  • It trades at a decent valuation. Around 10 times this years earnings.

The main reason for my short is that I still have not seen top line growth. As I mentioned in my previous article, the profitability improvement is due to margin improvements by cutting costs and converting to franchise stores. That can only last for so long.  

I don’t have much hope for Sears Hometown, but Sears Outlet is the wild card. It has seen strong same store sales growth over the last couple of years and has a unique business model. However, in the third quarter it was Sears Hometown with strong same store sales numbers and Sears Outlet with negative same store sales numbers.

I am curious to see how the numbers compare in the first quarter of 2013 before I decided to close my short or increase it.

I will keep you guys updated.

Disclosure: I am short OSH and SHOS