Hasbro stock has fallen about 14% over the past 12 months.
Brandon Bell/Getty Images
Finding stocks to buy has become increasingly difficult as the market has rocketed higher. Intrepid investors might want to look at stocks to short, or bet against, instead.
The
S&P 500
has risen 22% since a multimonth low at the end of October. The rally has included not just Big Tech—which has become increasingly expensive—but many other sectors as well. So while there are certainly stocks that could climb higher on better-than-expected profits, many shares have plenty of room to fall if the earnings picture darkens.
Investors could make money from those potential drops with short positions, which profit from a stock’s decline. In a successful short bet, an investor borrows someone else’s shares and immediately sells them. After the stock falls, they buy the shares back at a lower price and return them to generate a profit.
To be sure, short selling isn’t for the faint of heart. Stocks, over long periods of time, tend to rise. To make money, a short seller must be right that the price will fall within a specific time frame—usually just six months. And if a positive catalyst sends a shorted stock rapidly higher, short sellers can be forced to buy the stock to cover their bets quickly, making it an especially risky trade where losses can accumulate quickly. (During the height of the meme trade in 2021,
GameStop
stock was a poster child for the so-called short squeeze.)
This week, analysts at Wolfe Research published a screen of stocks that look like good short candidates. The screen included names with valuations that are arguably too high relative to the companies’ earnings potential. Consistent with that, the stocks had to have poor earnings quality, or a low predictability of earnings.
The screen includes
Plug Power,
ADT,
Tesla,
Walgreens Boots Alliance,
Hasbro,
and
ViaSat.
Current market positioning for these six suggests they could see more short selling in particular.
Many of the screen’s stocks also have relatively large debt loads. Walgreens is one example.
The company has more than $30 billion in liabilities net of cash, which includes debt and lease obligations—that figure is more than six times Walgreen’s expected 2024 Ebitda (earnings before interest, taxes, depreciation, and amortization). In comparison, many S&P 500 companies have debt-to-Ebitda ratios around one or two times, seen as less risky. In other words, Walgreens’ profits don’t cover its debts as well as other companies. Those debt levels will look even riskier if the profits keep falling as they have for the past several years.
In addition, the stock isn’t necessarily a good deal, despite its 40% drop over the past 12 months.
Walgreen’s valuation looks like a bargain on the surface: The company’s enterprise value is about 6 times expected 2024 Ebitda versus the S&P 500’s 13 times. But behind that multiple is a decline in profits over the past several years that investors wan the company to turn around. Plus, the majority of the company’s Ebitda goes out the door toward expenditures: In 2023, $4.9 billion of Ebitda translated into less than $1 billion of free cash flow.
These are all reasons short sellers could come back into the name, especially since only about 5.1% of Walgreens’ shares outstanding are shorted right now, according to Wolfe Research. Heavily-shorted stocks can often have closer to 50% short interest. If the company doesn’t turn around the profit picture, the stock will suffer.
Walgreens declined to comment.
Hasbro is another stock that looks cheap at first glance, but it could also be perceived as too pricey. It trades at 15 times expected earnings per share for 2024, compared with 20 times for the S&P 500. Hasbro’s multiple might seem a bit too expensive, however, when considering the quality of its earnings. The toy maker’s per-share earnings have declined in the past few years. This year’s expected per-share earnings, for instance, would be below 2019’s result. Continued earnings weakness could lead to further stock declines. Hasbro stock has dropped 13% over the past 12 months.
The company’s net debt is also about three times expected Ebitda for 2024, a larger multiple than that of the S&P 500.
These are factors that, unless the company either grows its profits or reduces debt, could attract short sellers. Only about 5.6% of the shares are shorted right now.
Hasbro pointed Barron’s to its executives’ comments about recent product successes on the company’s most recent earnings call. Plug Power, ADT, Tesla, and ViaSat didn’t respond to a request for comment.
As always, stock screens are only a starting point, and investors still need to do their research into individual companies. But short sellers that are brave enough to enter the fray could be rewarded.
Write to Jacob Sonenshine at [email protected]
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