One Stock You Might Want to Short

You might be impressed by a $2.6 billion business services company that grew revenue by 17% over the last twelve months.

Especially if you also knew that revenue and earnings per share grew at compounded annual growth rates of 32% and 33% respectively over the past 5 years.

After all, these long-term growth rates are similar to those touted by the likes of much-loved high-growth large caps like Apple and Google.

Too good to be true?
With all this, you would likely be intrigued to learn that insiders of this business services company I'd like to tell you about dumped 500 thousand shares of their company's stock this summer alone -- netting them over $20 million.

You'd question whether those numbers are really as strong as they seem.

You'd wonder whether these insiders -- which included the CEO, President and COO, a Director, and a slew of EVPs -- knew something you didn't.

And, after further research, you might be inclined to short this stock, which also happens to carry a P/E ratio of 116.

This was how I thought, especially after my suspicion was confirmed with a proprietary earnings quality analysis tool created by a Motley Fool forensic accountant that scans for potential accounting shenanigans. This tool gave the company an "F" for its "bad earnings quality."

Just ahead, I'll share with you the company's name and ticker. But first let me tell you more about why this company's numbers might not be as great as they seem.

Red flags waving
The first thing hinting to me that this company might be worth a deeper dive was that, although it posted impressive top-line growth year over year, its pre-tax margin took a significant dive.

Pre-tax margin is a good indicator of a company's operating efficiency and profitability, and is calculated by dividing operating income by revenues. For this company, it dropped from a respectable 17.5% in Q3 2009 to 14% in Q3 2010. So it's operating less efficiently and less profitably, despite those top-line numbers.

Another cause for concern is that the company's days sales outstanding (DSO) have also increased over the same time period, from 55 days in Q3 '09 to 60 days in Q3 '10, which might signal aggressive revenue recognition.

Related to this, the company's cash conversion cycle (a measure of how long it takes to convert sales into cash flow) is also rising, from 40 days a year ago to 45 days today.

The company's balance sheet also makes me nervous. It carries nearly $200 million in goodwill assets that may need to be written down at some point.

Even worse, it recently issued $250 million in senior convertible notes and warrants. Historically, this company has used minimal debt, so taking on such a massive amount in a manner that will dilute current shareholders down the road is yet another red flag.

Of course there's more
When I browsed through the latest proxy statement, another fact stuck out that seemed odd. The company has invested $4 million in a private company that one of its executive vice presidents is a shareholder of. He is also chairman of this private company's board of directors.
I'm not alleging there is necessarily something shady going on (though it's not outside the realm of possibility), but related-party transactions -- especially with an investment like this -- are always something that should raise an eyebrow.

And coupled with the other red flags, both of my eyebrows are up.

So what's the company?
The company I've been referring to is Concur Technologies (Nasdaq: CNQR  ) . Concur offers automated expense reporting and travel planning for large corporate clients, along with a few other automated HR-type tools.

The company, while it may save clients time, doesn't seem like its technology would be that hard to replicate, and it might be the sort of thing larger HR-outsourcing competitors like Paychex (Nasdaq: PAYX  ) or Automatic Data Processing (NYSE: ADP  ) could easily begin offering, driving Concur out of business.

It might even be something that cloud computing competitors like Salesforce.com (NYSE: CRM  ) and NetSuite (NYSE: N  ) might eventually offer as an added benefit for their current clients. Oracle (Nasdaq: ORCL  ) , through its acquisition of PeopleSoft, already has similar capabilities.

More important, the company's current offerings don't seem to be the sort of thing you'd want to pay 116 times earnings for, especially with a market cap of $2.6 billion. Other up-and-comer technological business services like VMware (NYSE: VMW  ) have similarly high P/Es, but its future and reach have greater potential, and it boasts a stronger moat than Concur.

Now obviously this quick case I just made to short Concur isn't exactly enough for you to make a decision on right now. But it does offer a strong beginning for more research, should you be interested in shorting that stock.

To find out what other red flags you might want to look for before you short Concur, drop your email in the box below. I'll immediately send you two brand new reports completely FREE to help you out, "5 Red Flags -- How to Find the BIG Short" and "4 Deadly Mistakes Even the Pros Make."

Adam J. Wiederman owns no shares of the companies mentioned above, nor is he short Concur Technologies. Google and Paychex are Motley Fool Inside Value recommendations. Salesforce.com, Google, and Vmware are Rule Breakers picks. Apple is a Stock Advisor recommendation. Automatic Data Processing and Paychex are Income Investorselections. The Fool owns shares of Google and Oracle. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 18, 2010, at 9:40 AM, wjcost wrote:

    Well, if it has developed some niche software that other companies might want, it might be a target for acquisition! The numbers cited are not so good, but maybe not all that bad. I wouldn't short it and I wouldn't buy it either.

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