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When targeting the best stocks to short this month, there's one thing all three of these companies have in common: overinflated adjusted earnings per share.
Adjusted earnings per share (EPS), or "non-GAAP earnings," are used by companies when one quarter's finances may appear abnormal because of one-time events. These "events" could include a restructuring or a companywide technology upgrade. However, some companies use this tool excessively to boost the appearance of their bottom lines.
Those are the types of companies we're targeting today with our best stocks to short list.
Small adjustments in EPS for issues involving currency exchange or one-time investments are normal. But one of these companies on our list has made adjustments of over 1,400% in a single quarter, mostly due to pension fund adjustments. That is not normal...
The adjustments for the pension fund didn't actually make the company more profitable, though, landing it at the number one spot on our stocks to short list this month.
Here are all three of our top stocks to short...
Best Stocks to Short No. 3: Time Warner Inc. (NYSE: TWX)
For the first three quarters of 2016, Time Warner Inc. (NYSE: TWX) adjusted earnings slightly. The changes mostly reflected currency exchange rate fluctuations.
The problem came in Q4. Time Warner started adjusting out the costs of the AT&T Inc. (NYSE: T) merger. This is something investors should note.
No one really knows how long or what the total cost will be when it comes to a merger. While the merger is a one-time event, the charges are likely to affect profits for two years or more as the merger is finalized. That means buying based on the adjusted profits could get you in trouble.
To add to the profitability issue, the merger deal has not been formally approved, so the companies may need to modify asset holdings in order to secure approval.
Don't Miss: Check out our "how to" guide for shorting stocks.
While the deal is expected to be approved, there is no guarantee. With that in mind, take a critical look at the adjusted EPS of Time Warner. The merger will impact profitability all this year. Until the merger is approved, the amount it will need to pay for the costs associated with the deal is unknown. That's why it is a great stock to short this month.
In addition to the merger adjustments, six analysts have downgraded their positions on Time Warner since December, while none have upgraded their positions. The downgrades are likely due to the fact that analysts are projecting a decrease of 2% for next quarter's earnings compared to the year prior.
Currently, TWX stock is trading for $98.18 for a gain of 1.7% year to date (YTD).
While Time Warner may be misleading about its merger costs, this next company only adjusts EPS when it misses expectations...
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