Throw This Stock Away

Let's reconvene for this week's stock diss at your local mall's food court.

There's a lot of extra elbow room in many of the country's malls these days, so we may as well take advantage of the ample parking, going-out-of-business sales, and those free food samples on toothpicks.

Now, where was I? Oh, right, I'm back to the "Throw This Stock Away" column, where I single out a stock that I think is heading lower. I'm no Grinch, though. I always come back with three alternative investments that I believe will perform better than the stock being heaved into the garbage.

Who gets tossed out this week? Come on down, Simon Property Group (NYSE: SPG  ) .

So that's why they call them mall rats  
Simon is the country's largest mall operator. It's holding up pretty well, on the surface. It closed out a difficult 2008 with funds from operations (FFO) -- the key metric in gauging a REIT's health -- clocking in 9.5% higher.

There are a few cracks showing, though. Simon also watches over outlet malls and lifestyle centers, but regional malls have been its bread and butter, and I spotted a troublesome trend there in last year's results. See whether you can spot my cause for concern.

Metric

2008

2007

Difference

Occupancy

92.4%

93.5%

(1.1%)

Sales per square foot

$470

$491

(4.3%)

Rent per square foot

$39.49

$37.09

6.5%

Simon's shareowners may cheer the company's ability to milk more rent out of its tenants, but how prudent is that approach when sales are faltering? It's no coincidence that occupancy slipped. The trend continued during this year's first quarter, with occupancy down to 90.8% as sales fell and rent rates spiked.

When even once-hot mall magnet Abercrombie & Fitch (NYSE: ANF  ) is shuttering concepts, you know that the landlords are hurting.

Don't let the past few months of bubbling consumer confidence kid you. Simon's pain is just beginning. Analysts know it. Three months ago, they expected Simon to generate FFO of $6.20 a share this year and $6.11 a share come 2010. Now it sees $5.90 and $5.72 in FFO per share over the next two years, respectively. That's after ringing up $6.42 a share in FFO last year, so we're talking about a company that won't grow again until 2011 at the earliest.

Along the way, how much smarter will retailers get about selling online? How will malls compete with Microsoft's (Nasdaq: MSFT  ) new Bing search engine, now paying customers to shop through its affiliates? Which way do you see occupancy levels heading as more chains scale back?

You can take comfort in Simon's hefty yield if you want, but it's really no different from a store mannequin: easy on the eyes, a breeze to dress up, but oh-so-very dead.

Back in January, Simon's quarterly dividend of $0.90 a share came with a catch. Only 10% of it would be in cash, with the other 90% paid out in stock. The result is like slashing its dividend by 90%. Simon has since officially cut its payouts to $0.60 a share, with no more than 20% in cash. Income chasers eyeing the tempting 4.8% yield should know that the cash yield is less than 1%.

Simon is the top dog in a dying industry. You can do better. 

Good news
As I have every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three new fill-ins.

  • Wal-Mart (NYSE: WMT  ) : You won't find Wal-Mart anchoring many suburban shopping malls. The discounter prefers to work alone or in strip centers where it dominates the landscape. It also doesn't hurt that the world's largest retailer offers great prices and runs a warehouse club that serves up even bigger savings in bulk. By beefing up its grocery selection, Wal-Mart now gets even more regular access to its customers. Having them come through the door more often makes it all the easier to move the apparel and electronics that may have otherwise been sold at a mall merchant, if Wal-Mart hadn't been so convenient. 
  • Amazon.com (Nasdaq: AMZN  ) : The leading online retailer continues to grow at a healthier clip than the market. Net sales and earnings rose 18% and 24%, respectively, in its latest quarter. However, the real mall killer in Amazon's arsenal is Prime, which lets folks pay $79 a year for free two-day shipping on any Amazon-stocked items. The service boosts loyalty, as shoppers check out Amazon's virtual storefront before firing up the car to trek out to the suburban mall. One can also argue that Overstock.com (Nasdaq: OSTK  ) will eat into Simon's outlet mall operations, but Amazon is the mainstream play on mall replacement. 
  • eBay (Nasdaq: EBAY  ) : I know that I've knocked eBay in the past, but the stock is now cheap enough to reconsider, warts and all. Given its growing PayPal platform and its global collection of online marketplaces, eBay is a major reason why real-world transactions have gone online. Even if it has to charge lower fees to compete with the plethora of free listing sites and mend fences with its power sellers, eBay isn't going away.

Farewell and thanks for all the toothpicks, food court.

Other headlines out of the weekly trash can:

Amazon.com and eBay are Motley Fool Stock Advisor picks. eBay, Microsoft, and Wal-Mart Stores are Motley Fool Inside Value recommendations. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz will probably still hit a mall this weekend, if only to pad his toothpick collection. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On June 26, 2009, at 12:49 PM, Patricia013 wrote:

    Sorry....I'm going to be hard-nosed on Ebay especially since my last listing there is languishing with only 2 views in 2 days! I'm not alone in this...other sellers are saying the same thing. Ebay is now so darned screwed up they'll never be able to untie the giant knot they've created. Think twice before buying this stock. Okay, they have Paypal, BUT a large part of their business is still people buying and selling in their core. Their core is where the big knot lies and it gets thicker with each hair-brained new policy they issue. Its kind of like someone barking orders who no longer has any authority to do so! They look arrogant and silly and fewer sellers are paying any attention to them. Sellers are making inroads in other venues. Its slow work - but its moving FORWARD....Ebay is NOT moving forward. Its simply being dragged up and down a bit by the mood of the market. Think on it.

    Ex 10+ year ebay seller

  • Report this Comment On June 26, 2009, at 1:05 PM, madmilker wrote:

    yeap! tat store with tat star in the name even wants to build on a Civil War Battlefield......

    People in America need to realize jus what got America in this shape…”cheap” yes so-call cheap items from a foreign land.

    quote*Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote!

    Now! if there be 182 country’s making items for the world to buy and they have only 5% of the pie in China…duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there…. but with the “yuan” going up in value and the US dollar going down…all the foreign items that the American consumer buys thinking it is cheap has went up in price.

    People…its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the “we the people” have to turn to the “second” largest employer in America(Uncle Sam) to sell “we the people” debt in order to get all them dollars back!

    50 years ago a foreigner would had given their left nut for a US dollar or a Hershey’s chocolate bar and today the same foreigner has got Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico. Wake up! America and think “MADE IN AMERICA.”

  • Report this Comment On June 26, 2009, at 3:13 PM, BIGGAINZ wrote:

    WEIRD BECAUSE URE BIGGEST HOLDING IS SIMONS AND MOST AGREE THAT URE IS GOING TO GET BIG GAINZ OVER THE NEXT COUPLE MONTHS BIG GAINZ

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