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5 Consumer Stocks That Could Pop - views
BALTIMORE (Stockpickr) -- All hail the mighty consumer!
In one way or another, consumer spending accounts for 70 cents of every dollar of GDP in this country, contributing a massive chunk of America’s economic engine. So it should come as no surprise that consumer spending can have an even bigger impact on individual consumer-driven stocks.
It also shouldn’t be a big surprise that those stocks have big targets on their backs. Consumer spending is one of the economic data points that has the biggest potential for volatility -- consumers can be a fickle group when it comes to parting with cash, after all.
But that’s exactly why investors searching for short squeeze opportunities should be looking at consumer names in May.
In case you’re not familiar with the term, a “short squeeze” is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket. One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which estimates the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.
Naturally, these plays aren’t without their blemishes -- there’s a reason that these stocks are being heavily shorted. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, these could be powerful upside plays for the coming year. And because equities haven’t yet reacted to the 4% increase in consumer personal spending in 2012, the potential for a snap higher is even bigger than before.
Without further ado, here’s a look at our list of consumer-driven short squeeze opportunities.
It’s been a mixed year for Weight Watchers (WTW). Shares of the weight loss company climbed close to 40% in 2012, only to give most of that back after the firm announced first quarter earnings earlier this month. Like many of the stocks giving back gains right now, WTW’s drop wasn’t justified by its fundamental performance; instead, it’s been more a case of exhausted buyers fleeing a major momentum name.
But the business is still looking attractive. Weight Watchers boasts an unmatched brand name in the weight loss industry, and an enviable network effect from its massive reach of brick-and-mortar locations and even point scores on restaurant menus. The popularity of Weight Watchers’ points on menus and grocery store foods makes it nearly impossible for rivals to get their own scores on products, and it makes the choice all the easier for consumers who are thinking about joining WTW.
While there’s ample competition in the weight loss space -- especially as rivals try to replicate WTW’s retail network-- this market is essentially Weight Watchers’ to lose. A solid balance sheet and deep margins are starting to make WTW look cheap again.
Better still, a short interest ratio of 11.8 means that it would take more than two weeks for short sellers to exit their bets against this stock at current volume levels. That makes this stock a prime candidate for a short squeeze.
At first glance, residential REIT AvalonBay Communities (AVB) may seem like a strange choice for a consumer-driven short squeeze stock. After all, housing isn’t exactly a discretionary element of consumer spending. But the must-have nature of AVB’s offerings makes it an even more interesting potential squeeze stock -- and a short interest ratio of 12.8 means that investors are stacked up against this contrarian company right now.
AvalonBay owns around 49,000 apartments in the U.S., primarily in key geographic areas such as Washington D.C., New York, and Boston -- rental markets that have high barriers to entry and consistently strong demand. That focus on higher-end multifamily homes means that AVB is less susceptible to housing market hiccups than most residential REIT peers, and that revenues are far more consistent in turn. With issues still haranguing home sales across the country, AVB’s apartment offerings are a solid option for consumers who are putting off a purchase.
There are some critical differences between residential and commercial REITs. The biggest is that consumer laws prevent residential landlords from entering into the sweetheart lease agreements that commercial REITs get to pen. But strong demand for AVB’s properties make this firm the best-in-breed housing REIT, paying out a 2.63% dividend yield right now.
Hefty shorting could drive a short-term pop in shares of this stock.
AvalonBay was included in a list of 10 Stocks That Show the Real Estate Boom Has Arrived.
As the country’s sixth-largest provider of cellular phone service, U.S. Cellular (USM) is off many investors’ radar. After all, the cell phone business is effectively a duopoly here in the U.S., with top dogs Verizon (VZ) and AT&T (T) taking a massive chunk of the market between them. But even though scale isn’t an advantage that U.S. Cellular has, the mid-cap telecom stock does have some attractive attributes right now.
If you can’t dominate on scale, you’ve got to find a different niche to survive in the cellular business. USM found that by becoming the customer-centric customer – for an industry where bad customer service is the norm, USM’s customer experience initiative does make the stock stand out. That, plus a solid network, is one reason why the firm’s 6 million customers tend to be so sticky.
Let’s face it: USM isn’t going to start eating market share from the big name networks anytime soon. But with only a quarter of its existing customers on smartphones, there is ample upselling room left on U.S. Cellular’s customer Rolodex. Consistent cash generation capabilities could also make USM an attractive smaller acquisition target for one of the bigger players -- a move that would instantly send shorts panicking for the exits.
With a short interest ratio of 11, it would take more than two weeks of buying at current trading volumes for those short-sellers to find the door.
As the world’s largest video game retailer, GameStop (GME) is another stock that serves a very specific niche. The firm boasts more than 6,600 retail locations across the world, as well as an online store, and a publishing business that puts out Game Informer -- a magazine that boasts a subscription base of 4 million gamers.
With all eyes on major flubs at bigger electronics retailers like Best Buy (BBY), you wouldn’t think that smaller names like GameStop even stand a chance. But GME isn’t really in the same business. Instead, this firm has plenty of reasons why it’s not just another showroom for Amazon.com (AMZN).
For starters, GME boasts an 80% share of the used video game market, a business in which the benefits of being able to return or exchange titles at a brick-and-mortar store are critical. While BBY has introduced its own used-game section, the firm can’t provide the same inventory that GameStop has, so the big-box store is left playing catch-up.
At the same time, GME has been working to send people to its online store through a rewards program and an online distribution network. While the popularity of consoles is a threat (manufacturers tend to own their online networks), it’s not a black cloud to GME’s existing business.
GameStop’s short interest ratio of 19.9 is the highest on this week’s list of consumer-driven short squeeze stocks. At that level, it would take a full month of buying pressure for shorts to cover their positions in GME.
Last up is department store chain Dillard’s (DDS), a firm that operates more than 280 stores and 16 outlets focused on the Southern U.S. The company also owns a large general contracting business.
While top-line numbers still haven’t surpassed pre-recession highs, profits have been growing at a breakneck pace since they bottomed in 2009. Net margins have been consistently ringing in at more than 7%, a mammoth margin for a department store chain. That earnings momentum is fuelling fundamental improvements for shareholders of this mid-cap retail stock.
That’s because financially, Dillard’s is in strong shape with close to a quarter-billion dollars in cash on its balance sheet and an easily tenable debt load. A more svelte post-recession operating profile makes the firm even better suited to withstanding economic headwinds going forward.
Still, a short interest ratio of 11.7 means that short sellers are piled in against this stock. With shares already up dramatically in 2012, any additional gains could prove too painful for shorts to hold their positions -- the firm’s May 19 shareholder meeting could be its next upside catalyst.
To see this week’s short squeezes in action, check out the Consumer-Driven Short Squeezes portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.