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Don't Bet Against The Bear

Posted: Mar 11, 2009 15:52 PM by Todd Shriber

Tickers in this Article: VMC, MTB, MLM, FRT, BRK-B, BRK-A

"If you're long, you're wrong" has been a familiar refrain for investors over the past 18 months as Wall Street has deteriorated to levels not seen since 1997. In a bear market of this magnitude, truly the only way to make money is to short stocks.

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While shorting may not be everyone's cup of tea, investors should pay attention to stocks that have rising short interest. To those new to going short, a rising short interest in a stock presents a unique way to make money on the long side because the shorts will eventually have to buy shares to cover the shares they borrowed to go short. (Find out how this figure can be a real eye-opener on market sentiment of a given stock in Short Interest: What It Tells Us.)

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Shorting is a strategy that is not without risk, and even if most folks don't employ it, monitoring stocks with rising short interests can prove useful because it can be a great indicator that it is time to dump a stock that the bears have gotten hold of.

Let's take a look at a few stocks that came up in a screen for short interest of 15% or higher of the company's float:

Company	Short Interest	YTD Performance
Federal Realty Investment Trust (NYSE:FRT)	24.4%	-28%
M&T Bank (NYSE:MTB)	16.2%	-38%
Martin Marietta Materials (NYSE:MLM)	18.7%	-23%
Vulcan Materials (NYSE:VMC)	17.4%	-48%

Financials, Of Course
After trading above $95 twice in 2008, M&T Bank shares were trading below $30 as recently as March 6, 2009. While not as infamous as bigger banks like Citigroup (NYSE:C) or Bank of America (NYSE:BAC), M&T has become a favorite target of short sellers. Oddly enough, M&T's stock was initially left off the SEC's list of unshortable stocks last fall before being added later. Banning short sales proved to be a futile endeavor by the SEC and did nothing to help M&T shares.

And as is the case with so many downtrodden banks, Warren Buffett's Berkshire Hathaway (NYSE:BRK.A, BRK.B) is a significant shareholder in M&T, owning 6.7 million shares. There appears to be more profits on the way for the bears with M&T's stock. The bank primarily operates in Northeast, and some analysts expect rising unemployment in states like New York and New Jersey to imperil Northeast banking stocks much the same way regional banks in the West have been hurt by the rising tide of lost jobs.

M&T pays a $2.80 annual dividend, good for a 7.7% yield, and surprisingly has not been mentioned in the chatter of banks likely to cut their dividends. While the dividend may remain intact and M&T's shares appear cheap trading at only around 0.6-times book value, it's probably best to to steer clear of the stock until the bears have moved on to another victim.

Real estate investment trusts (REITs) have become another favorite target of shorts as the weakened economy has spelled disaster for commercial real estate holdings across the U.S. Despite the grim outlook, shares of Federal Realty Trust could soon be added to the S&P 500, which could be good for a short-term pop.

Federal Realty is a good example of a “guilt by association” stock. So many of its peers have been battered by the bear market that the company was probably just next on the hit list of shorts. In reality, Federal Realty has a strong balance sheet and some expect the shares to reach $53 this year. (Knowing what the company's financial statements mean will help you to analyze your investments, see Breaking Down The Balance Sheet.)

Investors should be aware that REITs have to pay out 90% of their profits in the form of dividends and many cash-strapped REITs have recently said they will issue new shares rather than pay dividends in cash, which dilutes shareholder value. Federal Realty currently pays out $2.60 a share annually.

Materials Mess
Shares of basic materials companies have been another favorite of short sellers over the past year, though they could see some relief in the near-term in the form of President Obama's stimulus package. Companies like Martin Marrietta are relying on infrastructure projects included in the stimulus plan to bolster 2009 results. In fact, the company has said 2009 profits could rise 50 cents to 75 cents a share, depending on the effects of the stimulus plan.

While the stimulus package may help, investors need to keep in mind that Martin Marrietta and rival Vulcan Materials, both have significant exposure to the real estate market as well and no matter how hard Uncle Sam tries, his efforts seem to go for naught when it comes to spurring housing sector.

The bears are definitely in control of Martin Marrietta's stock, as the shares closed March 9 at $70.25 after going for $88 less than two months ago. The March 10 bounce brought shares up to around the $75 mark. The company trades at 18-times earnings, which certainly isn't cheap, and is also a possible indicator that the shorts could ride this stock down further.

Same sector, same story for Vulcan Materials. The company is well-positioned to benefit from the stimulus plan, but it the housing market needs to perk up before investors start running into Vulcan shares. The company pays a $1.96 annual dividend, but the payout ratio is somewhat high at 77% and this is another issue for investors to watch.

Like Martin Marrietta, Vulcan trades around 18-times forward earnings, meaning it's not in the bargain bin quite yet. In addition, shares of both companies rallied off their November lows in late December in what many believe was a short covering rally, so betting on another rally prompted by short covering appears to be a risky bet right now.

Don't Bet Against The Bear
While the overall fundamental stories with the stocks mentioned here may be sound - and even that is up for debate - long investors should shy away from these names until it becomes clear that the economy is rebounding and that the sectors highlighted here are gaining strength. An early entry into these names and your investment could fall victim to a bear attack.

By Todd Shriber

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