Up until about a year ago, I had never shorted a stock. In basic terms, shorting a stock means you actually borrow it rather than buy it in hopes that it goes down in price so you can buy it back later at a cheap price when returning the shares. One look at the S&P chart over the last 100 years quickly explains why shorting a stock is usually a bad idea- you are taking a contrary bet within a market that as a whole has had a fairly steady upward trajectory over time. Not only are the odds not in your favor but you have to pay interest for the privilege of borrowing the stocks you are shorting.
My first short was inspired last May as a result of leaked comments from the CEO of Abercrombie and Fitch (Mike Jeffries), who basically said that he didn’t want dorks or fat kids wearing Abercrombie clothes. The market barely blinked at this comment despite well organized protests online from high school students who urged their peers to shun the store and donate their Abercrombie clothes to Goodwill. The comments ticked me off at a personal level, but on a common sense level I knew that retail sales for the specialty apparel shops were already under fire, and that this could only hurt them further heading into the next quarter’s sales. Also, I had a gut instinct that Abercrombie’s glory days were in the past, back when I was a dorky high schooler in the mid 1990’s and too insecure to throw on “Woods “ cologne despite its reputation as a chick magnet. I digress… Short story long is that it worked out well for me when the stock tanked after the 2Q-13 earnings were announced.
Today I am very interested in shorting a retail REIT (specifically, a company focused on owning grocery-anchored retail centers) for a variety of what I deem to be common sense reasons:
- It is completely absurd what grocery-anchored shopping centers are selling for today on a projected return and cap rate basis. Well located retail properties today are selling for current returns as low as 5%, even less in prime markets. Institutional investors are fleeing to this property type and justifying huge price tags by considering their “recession-proof, safe haven characteristics”.
- Traditionally there has been a view that grocery-anchored retail is cushioned from e-commerce competition because people still prefer to shop for food at grocery stores, which drives traffic to the surrounding retail. Even if one were to agree with this premise (which I think is hogwash- Amazon, Walmart, and others have the grocery market in their cross-hairs), retail-anchored grocery owners traditionally make their money from the surrounding retail rents, not the grocers themselves who can negotiate extremely low rental rates. In other words, the property owners are primarily depending on capital appreciation and income from other retailers that are less recession and e-commerce proof.
- When I compare retail REIT dividend yields and P/E valuations with other REIT vehicle options (like CLNY, one of my favorite plays), they tend to have both lower dividend yields and higher P/E ratios. That’s not good- it only makes sense if you believe that their potential for growth is much higher than other REIT vehicles. A lot of the top retail REIT’s offer dividends around 3-3.5% with current forward P/E ratios around 20. That does not get me excited when I can buy CLNY with a 6%+ dividend yield and an 11.5 forward P/E.
I have yet to select which specific retail REIT I’d like to short. I need to do some research and a find a REIT that has recently made a bunch of dumb acquisitions, has high debt exposure, and market concentration in areas that I think are more susceptible to e-commerce competition on the grocery side. Regency Centers (REG) and Acadia (AKR) are two initial REIT’s that come to mind, but I still need to do more homework After all, the decision to short a stock warrants a higher standard of justification than going long on a stock for the reasons mentioned earlier.
Against the grain we go,