Good Companies Are Horrible Shorts

 | Jul 03, 2014 | 6:21 AM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

gis

,

gm

,

cag

If you are running a hedge fund you live to find a short idea that might produce sharply worse than expected earnings. You pray that the CEO is upfront on the call and just outright says the quarter was disappointing. You want to see terrible earnings, weak sales and slipping gross margins.

In short, you wanted to be short the stock of General Mills (GIS), the cereal company, the breakfast of short-selling champions everywhere, because of its recently fessed-up to -- admittedly subpar -- quarter.

Yet how has the stock done since CEO Ken Powell put right up top in its release "Our sales and operating profits were disappointing?"

Sure it got hit, falling from $53.70 to $51.70 in a single day. But now, amazingly, it's coming right back, closing at $53 last night.

You have to ask yourself, how can this be? How can a company that has 1% growth in sales and a decline of 2% in profits, a company that admits to falling prey to rising inflation and promotional spending that wasn't effective, not have a stock that gets hammered and stays hammered?

How about because the company returned $2.7 billion in cash to shareholders in the last year in the form of a 17% dividend hike and a purchase of 36 million shares in the open market?

How about because this company gives you a 3% yield, much better than Treasuries, after taxes? How about that it announced that it will do big restructurings and cost cuttings that will presumably produce even more free cash flow for more stock buying and dividend boosting?

Yep, in this market it's hard to keep a good stock down. Nor is General Mills that much of an aberration. Unless an analyst very specifically says that a dividend is in question, or a CEO says the company's doing its best to PRESERVE the dividend, a quality name brand stock just doesn't get rocked the way it used to.

Consider General Motors (GM), a stock I like very much and which is owned by my charitable trust. We have been buying it consistently on the way down, in part because it has huge cash flow -- more than enough to be able to boost that already outsized dividend if the board wants to, despite the recall charges. As long as that dividend remains unquestioned -- and I don't know a soul who does question it -- the darned stock seemed to be able to withstand pretty much everything the market could throw at it. Now that it turns out the sales are terrific, it's gone from what seemed to be a lay-up decliner to an outright frightening short.

Now you can't just stand there and buy every higher-yielding play out there. Conagra (CAG), a second-tier consumer products company that also reported a hideous quarter, recently wrote in its release: "the company plans to continue its $1 per share annual dividend and is committed to maintaining a strong dividend policy." Frankly, though, the fact that they even had to mention that policy I found worrisome. Still, the stock plummeted four points from the $32.90 level only to recover half that loss already.

Now all of this doesn't' mean there aren't good shorts out there. When you consider all of the junk this market brought public in the later winter and early spring, when you drill down to all of the companies that don't have earnings but just have hopes, you know that as they rebound, another chance to sell short will beckon.

The simple fact is, though -- as my friend and writing colleague, Matt Horween, who pointed out the resilience of the stock of General Mills to me, said -- companies with good balance sheets, good dividends and lots of free cash just don't stay down the way they used to. Sure, they don't make for great longs, so to speak. But wow, are they horrible shorts and maybe that's a defining aspect of this stock market as we head into earnings season. Random musings: if I don't catch you later, have a very happy Independence Day!

Would you like to test drive all of TheStreet's premium products for free? Sign up for our all-access pass for July at absolutely no cost to you and read Action Alerts PLUS picks from me and Stephanie Link, Doug Kass' Daily Diary on Real Money Pro, Stocks Under $10 picks from David Peltier and much more. Learn more here.

Columnist Conversations

I set you up for the trading Week Ahead from the floor of the NYSE with Peter Costa of Empire Executions... Ha...
LNKD is trading $226.08, up 3.1% with IV30™ up 0.4%. This is a stock price and volatility note on a so...
From Moody's: "Dynegy announced that it expects to finance the transaction with $5 billion of unsecured notes ...
Kohl's is beginning to lose its upside momentum this week. The stock has been in hyper drive since the ...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.