While the markets are hitting all-time highs, it can be easy to overlook the enormous profit potential of the top stocks to short.
Today, the Dow hit an all-time high of 20,125.58. But not every stock is climbing because it's a solid investment. Some are rising with the markets despite having dismal financials. Those are the types of stocks we're targeting today.
By shorting stocks, you're betting that the price of that stock will decline (for more information on how to short stocks, check out our complete beginner's guide).
Industries that have faced major disruption are great places to look for stocks to short. Some of the best examples of these industries include news and retail. The news industry has seen declining circulation numbers that are eating into company profits. The retail industry is facing lower store traffic, which is causing companies like The Limited to close all of their stores.
Here are the top stocks to short now...
Top Stocks to Short No. 4: News Corp.
News Corp. (Nasdaq: NWSA) operates in the disrupted news industry that we mentioned earlier. Weekly circulation for the industry as a whole was down 7% in 2015 (the most recent data), and Sunday circulation was down 4% in the same year.
"While the political world was turned upside down by the Trump ascendancy, the media world was exposed for its bias and intellectual vacuity. It has become obvious to an increasing number of Americans that the mainstream media has seen its best days," said Money Morning Global Credit Strategist Michael Lewitt.
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While the industry as a whole is facing major challenges, News Corp. is barely hanging on. The owner of The Wall Street Journal has been facing declines in earnings per share with EPS last quarter of -$0.01.
The company is scheduled to announce 2016 Q4 earnings on Feb. 9 after the markets close. Forecasts put EPS at $0.18, which seems aggressive. Earnings per share for the past year have been:
- December 2015: $0.20
- March 2016: $0.05
- June 2016: $$0.12
- September 2016: -$0.01
NWSA stock has missed EPS expectations three of the last four quarters. September 2016 earnings numbers were particularly dismal. EBITDA (earnings before interest, tax, depreciation, amortization) was down 21% from the same quarter a year prior. On top of that, cash flows have taken a major hit. Cash flows for the quarter ending September 2016 were -$317 million, compared to $67 million for the same quarter the year prior.
Currently NWSA stock is trading at $12.12, up 5.85% year to date (YTD).
Top Stocks to Short No. 3: Gannett Co. Inc.
The next stock to short is another news outlet, Gannett Co. Inc. (NYSE: GCI), which owns USA Today.
Gannett is expected to announce earnings for the quarter ending December 2016 on Feb. 9 at 10:00 a.m. It is not likely that the announcement will boost its stock price since it is trading above its current book value per share of $9.14.
For the quarter ending September 2016, the company announced EPS of -$0.20 compared to $0.33 for the same quarter the year prior. It has failed to meet analysts' earnings expectations in three of the last four quarters by an average of 47%.
As Gannett's liabilities increased, its cash and equivalents decreased. At year-end 2015, the company had $1.37 billion in total liabilities and just $197 million in cash. By the end of September 2016, Gannett had $1.69 billion in liabilities and $117 million in cash.
GCI stock is currently trading at $9.50, down 1.24% YTD.
Top Stocks to Short No. 2: Macy's Inc.
Macy's Inc. (NYSE: M) is the latest victim of the changing retail sector. Department stores as a whole had $12.8 billion in sales in November and December, which is down from $13.68 billion for the same time period last year.
On Jan. 4, Macy's announced it will close 68 of 730 stores and lay off almost 10,000 employees. The decision came from holiday sales that were down 2.1% year over year at licensed stores and down 2.8% at stores owned by the company.
"The company was not expecting this news, another sign that management is failing to adjust quickly enough to the changing retail landscape," said Lewitt.
The latest earnings announcement marks seven quarters the company has seen declining sales.
Problems like declining traffic, low-cost competitors, and heavy discounting to generate sales are characteristic of the retail industry as a whole. With management not responding to the changing industry quickly enough, Lewitt has a price target of $20 in a year for Macy's.
M stock is currently trading at $30.00, down 15.67% YTD. If it hits Lewitt's price target, the stock will fall another 33%.
The best stock to short is a ticking time bomb with an end date of 2020...
Top Stocks to Short No. 1: Weight Watchers International Inc.
Lewitt's take on Weight Watchers International Inc. (NYSE: WTW) shows why the company rallied earlier this month despite struggling to stay afloat.
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"One of the money-losing companies that rallied sharply recently was Weight Watchers International Inc., which popped up when it announced the totally irrelevant news that major shareholder Oprah Winfrey lost more weight (I mean, seriously, is that not the stupidest reason ever given for a stock to rise in the history of markets?)," Lewitt said.
The company has a huge debt load maturing in 2020. Principle payments are $21 million per year for 2017-2019 before needing to refinance in 2020 for the company to stay solvent. To make matters worse, Weight Watcher's cash and equivalents went from $241.5 million down to $99 million when the company repaid $208 million in bank debt at the end of October.
Revenue is up 2.7% for the quarter ended Oct. 1, 2016, from the previous year's Q3 revenue. The problem is that this growth is not fast enough if the company hopes to get out from under the debt load it has taken on.
WTW stock is currently trading at $11.89, up 4.98% YTD.
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