Should You Short AT&T Right Now?

It may sell the hottest smartphone on the market, but AT&T (NYSE: T  ) faces a slew of problems. Its wireless network sags under the weight of users' data demands, earning the company a lousy reputation for dropped calls and spotty reception. And rumors persist that its crown jewel, Apple's (Nasdaq: AAPL  ) iPhone, could soon be available on its archrival Verizon's (NYSE: VZ  ) wireless network as well. With so many dark clouds looming over the company's signature blue-and-white globe, is now the right time for investors to bet on AT&T's continued misery?

On The Motley Fool's Twitter feed, follower @hutsell215 asked:

With a Verizon iPhone set to hit stores in January, AT&T's best days may be numbered. Is a long-term short of $T a safe play?

We've posed that question to three tech-savvy Fools, to see whether they think AT&T is worth shorting, or whether betting against other stocks might prove a better bet. Remember, any stocks they suggest are just ideas for further research, and not ironclad recommendations.

The pessimistic side of pessimism
Anders Bylund, Fool contributor
Long shorts are bad news in general, even if you call them Bermuda shorts. I've made money on long-term shorts before -- like when the disastrous hurricane season of 2005 pushed up the price of natural gas, making it impossible for Terra Nitrogen (NYSE: TNH  ) to sell its fertilizers at a profit. But long-term shorting is a risky business.

There's so much that can go wrong:

  • Your bet turns out to be wrong and the stock goes up. Ouch!
  • The descent into nothingness takes too long, and the company pays dividends. You're responsible for those payouts, my friend.
  • You get hit with a margin call before you're ready to close the short, perhaps for reasons unrelated to the stock you shorted.

Those three caveats only scratch the surface. In the case of AT&T, they provide at least two strikes against this strategy: The stock isn't terribly expensive and might bounce up, and you really don't want to pay out a 6.3% dividend yield on a stock with a beta less than the market-average 1.0 mark. In short (no pun intended), betting against the telecom has too much risk, not enough upside.

You'd probably be better off placing a long-term short on something like salesforce.com (NYSE: CRM  ) or Titanium Metals (NYSE: TIE  ) . In their cases, price gains that look like speculation, sky-high valuations, and far more volatile beta ratios all improve your chances of making a profit with this strategy. Just as importantly, neither company pays a dividend.

The flashing neon "DOOMED" sign probably didn't help, either
Rex Moore, Fool analyst
I know people are really down on AT&T right now. It seems every story I read about Apple's iPhone mentions how badly folks want to be able to use it with any carrier other than AT&T. All we hear about is how poorly the carrier handles network traffic; the many calls it drops; its network's poor reception; and management's deep hatred of kittens.

Everyone already knows about these things, fair or not. The perception out there is that half of AT&T's subscribers will leave as soon as Verizon or some other carrier gets the iPhone.

But see, that's the problem. Because everyone already knows about these dangers, the potential for disaster is already priced into the stock. What, you thought you were the only one who thought about this?

So while the company may have some problems to overcome, I don't think it would make for a good short. In fact, it has a low enough forward P/E multiple, and decent enough financials, that it showed up at No. 3 on my list of the best value stocks in telecom. At this price, it'd probably make for a better long than a short.

I'm not dead yet! In fact, I'm feeling better!
Tim Beyers, Fool contributor
I've been wondering about shorting AT&T for months. At one point, I was convinced that shorting the former Ms. Bell and every other telco was a wonderful idea. I still have open short positions in Sprint Nextel (NYSE: S  ) and Verizon in my CAPS portfolio, but I closed my AT&T short -- profitably -- in April.

Strong earnings scared me off. "AT&T has been in a cocoon for years, slowly transforming itself from a wireline caterpillar into a wireless butterfly," I wrote at the time. "Last night's earnings report suggests the metamorphosis is accelerating."

Last month, the trend continued. Revenue remained flat as adjusted overall profits improved 13%. Why? A better product mix. With more Android and iOS smartphones on its network, AT&T improved data revenue by 27% last quarter. Investors were pleasantly surprised; shares of AT&T have risen more than 4% since its late July report.

That's a problem for short-sellers. AT&T's data business could deliver surprising growth for years to come. My advice is to buy here and reinvest the 6.3% dividend until the smartphone market becomes saturated.

Why mess around with AT&T?
John Del Vecchio, CFA
As a guy who shorts stocks for a living, AT&T is not at the top of my list. One reason is because, when identifying high probability short opportunities, I'm less concerned with valuation and prefer to hang my hat on specific accounting issues, such as aggressive or accelerated revenue recognition. I just don't have a smoking gun with AT&T.

I mechanically screen thousands of companies a day, searching for evidence that earnings are being massaged by management to mask a deterioration in its business – and dig into dozens of those. AT&T isn't on my radar. Moreover, while the loss of an exclusive distribution for the iPhone could be a catalyst that leads to lower growth, the timing is entirely unknown. And there's another reason to tread lightly.

Sentiment is a bit negative for the company. Over the years, AT&T has transitioned from a core holding in many portfolios to a down-and-out also ran. In such cases, positive news can lead to a dramatic spike in the price. Meanwhile, the rich dividend yield makes carrying a short position expensive. Bottom line, why short a company like AT&T on a hunch when there are plenty of other companies out there who are playing fast and loose with their accounting – or worse?

Want better short ideas?
If you'd like more information and advice about finding high-probability, big potential short candidates, we can help! A brand new report from our forensics accounting expert John Del Vecchio, CFA reveals five red flags that suggest it's time to short a stock (or get it out of your portfolio). Just drop your email address in the box below, and we'll whisk a free copy to your inbox. You'll also be the first to hear when John's new research is available. Simply enter your name in the box below now.

None of the writers who contributed to this roundtable hold any financial position in the stocks they wrote about. Sprint Nextel is a Motley Fool Inside Value recommendation. Salesforce.com is a Motley Fool Rule Breakers choice. Apple and Titanium Metals are Motley Fool Stock Advisor recommendations. The Motley Fool's disclosure policy has no height requirements.


Read/Post Comments (5) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 11, 2010, at 3:36 PM, conradsands wrote:

    In a poll that asked 4,040 smartphone users in March how many dropped calls they had experienced in the past three months, AT&T — the exclusive U.S. carrier of Apple's iPhone and iPad mobile devices — came in dead last among the country's four largest carriers.

  • Report this Comment On August 11, 2010, at 6:07 PM, bugahamike wrote:

    I agree with Tim. T is a buy for it's cash flow if nothing else.

    By the way, I'm not a widow or an orphan but this stock will work for them too.

  • Report this Comment On August 11, 2010, at 6:41 PM, rgperrin wrote:

    "One reason is because, . . ."? Let's hope John Del Vecchio's grasp of investing exceeds his grasp of English usage. The only way that this could be made worse is to write, "One reason why is because. . . ." But aside from his careless writing, Vecchio's article is sound is sensible enough.

  • Report this Comment On August 11, 2010, at 10:44 PM, thidmark wrote:

    I love it when the grammar sheriff shows up and leaves us with something like this: "Vecchio's article is sound is sensible enough."

  • Report this Comment On August 11, 2010, at 11:53 PM, ChuckWoolery wrote:

    @thidmark haha, that's awesome. But back to the article, I agree with both Rex Moore and Del Vecchio. The price is built in for the the Iphone debacle. Also why short a stock carrying a nice dividend and has nice cashflow to hold on?

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