Please ensure Javascript is enabled for purposes of website accessibility

3 Stocks to Get on Your Watchlist

By Sean Williams - Jun 19, 2013 at 4:45PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The market may be nearing new highs, but here are three watchlist-worthy short-selling opportunities to keep your eyes on.

I follow quite a lot of companies, so the usefulness of a watchlist to me cannot be overstated. Without my watchlist, I'd be unable to keep up on my favorite sectors and see what's really moving the market. Even worse, I'd be lost when the time came to choose which stock I'm buying or shorting next.

Today is Watchlist Wednesday, so I'm discussing three companies that have crossed my radar in the past week -- and at what point I may consider taking action on these calls with my own money. Keep in mind that these aren't concrete buy or sell recommendations, nor do I guarantee I'll take action on the companies being discussed. What I can promise is that you can follow my real-life transactions through my profile and that I, like everyone else here at The Motley Fool, will continue to hold the integrity of our disclosure policy in the highest regard.

With the markets once again near their yearly highs, I'll focus my efforts on three short-sale candidates.

Abercrombie & Fitch (ANF 1.77%)
If companies were measured by the actions of their CEOs, then Abercrombie's share price should have gone to zero by now.

Abercrombie's CEO, Mike Jeffries, has been nothing short of a circus act for his company, detracting from its actual performance and placing all eyes on his choice words and actions throughout the years. Recently, Abercrombie again had to deal with exclusionary comments Jeffries made with news website Salon in 2006 with regard to how the company would market its product and the type of individual it would prefer to wear its clothing. The result was public outrage and the strong possibility that domestic sales would again suffer at its flagship brands in the interim. 

From a valuation perspective, it's been a while since Abercrombie & Fitch was this inexpensive. At just 12 times forward earnings and paying out a 1.6% yield, Abercrombie does have a brand that could inspire value seekers to take the plunge. As for me, I'd suggest looking for those exists.

Abercrombie's big problem is that it doesn't have a good understanding of the niche middle-class consumer. Aeropostale (AROPQ) is among the companies struggling on the low end by having to use big discounts to attract customers because their brand value is lacking. For a while, Aeropostale was able to move enough volume where this wasn't an issue, but it has become a burdensome underperformer since the recession. On the high end, Abercrombie is also struggling because its pricing (and public image) aren't in tune with what customers want despite maintaining good brand value -- not to mention that its push into Europe in the face of austerity measures hasn't been the wisest move. The real winner in teen retail looks like American Eagle Outfitters (AEO 3.12%), which is hitting the sweet spot in terms of price while also maintaining a strong branding presence in stores and online.

If you're looking at teen retailers, consider making the bet against Abercrombie and digging deeper into American Eagle Outfitters.

Hershey (HSY 0.53%)
That bitter taste in my mouth is Hershey's frothy valuation.

Hershey has been riding high on a wave of lower expenses brought about because sugar prices are at a three-year low. With costs low, Hershey has been able to simply keep pace with inflation on its pricing while keeping its marketing budget at bay and relying on its brand name to drive margin and sales growth. The worry here, though, is that neither sales trends nor sugar prices are going to work in Hershey's favor in the long run.

Despite defying weak global growth trends, the chocolate industry is forecast to be worth a staggering $98.3 billion in 2016. However, that translates to an average growth rate of 3.4% between 2011 and 2016. Hershey's growth rate is a bit faster than that, at roughly 6% per year, but it hardly does justice to a forward P/E of 22 -- thus making a PEG ratio of nearly 4 for a confectioner!

The other concern here is that the U.S. Department of Agriculture plans to purchase excess sugar from domestic manufacturers to curb the surplus and aid sugar prices. That move could quickly eliminate the margin-boosting benefit Hershey has been enjoying over the previous year and may cause investor opinion of this expensive stock to sour.

My suggestion: "Kiss" this stock goodbye.

Frontline (FRO -1.72%)
Shares of Frontline, a transporter of oil and oil products, as well as coal and iron ore, shot higher earlier this week despite no specific news. Many investors might remember Frontline as a company that paid out a double-digit yield as recently as a few years ago. However, the landscape of the shipping sector has drastically changed, and even at just $2 a share it's no longer the value it once was.

The biggest concern with Frontline is that it's levered its balance sheet to the hilt to take advantage of rising oil prices. It seemed like a solid idea at the time, but plenty of other shippers had the same idea. Now, these same shippers are dealing with very low charter rates and often short-term contract lengths because of the uncertainty associated with commodity prices and demand. Frontline, for instance, has $1.3 billion in net debt and has scraped together only $12 million in positive free cash flow over the trailing 12 months -- hardly enough to maintain a fleet of commodity-transporting vessels.

Unless oil prices soar or China's GDP reverses a two-year downtrend, the survival of Frontline could be in serious question. Worse yet, the company has $225 million in convertible bonds that come due in April 2015 that, as of now, it doesn't have the funds to cover. I would strongly suggest looking into the idea of shorting into any serious strength in Frontline.

Foolish roundup
Is my bullishness or bearishness misplaced? Share your thoughts in the comments section below, and consider following my cue by using these links to add these companies to your free, personalized watchlist to keep up on the latest news with each company:

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Frontline Ltd. Stock Quote
Frontline Ltd.
$12.01 (-1.72%) $0.21
The Hershey Company Stock Quote
The Hershey Company
$230.65 (0.53%) $1.21
Abercrombie & Fitch Co. Stock Quote
Abercrombie & Fitch Co.
$21.23 (1.77%) $0.37
Aeropostale, Inc. Stock Quote
Aeropostale, Inc.
American Eagle Outfitters, Inc. Stock Quote
American Eagle Outfitters, Inc.
$13.56 (3.12%) $0.41

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.