“They actually needed to do some CapEx just recently and they couldn’t even come up with a debt-type offering because they’re so stretched,” he said. “They did a capital lease. That’s again pulling more liabilities going out. They played with some depreciation where Qwest had some depreciation that was, say, six or seven years left. They took it out to 10 or 15. They’re playing a lot of games, and we really feel like this is the type of name where, if there is weakness in the economy, this thing really gets whacked — 25, 40 percent.”
Coach, Inc. (NYSE:COH)
Coach, Inc. (NYSE: COH) was a 2.8 percent short position as of Feb. 4, making it the fund’s eighth largest. It was one of the few positions to help HDGE’s share price recently as the market generally roared to the upside during the first month of 2013.
Coach shares were battered after the company missed earnings estimates for the first time in seven years and saw same-store sales in North America decline year over year for the first time in 11 years.
The holiday season highlighted complaints of stale merchandise and competitors in the high-end retail space encroaching on Coach’s traditional territory. Several analysts pointed to the challenge posed by high-end competitor Michael Kors Holdings Ltd (NYSE: KORS).
Coach’s “share losses in the U.S. are accelerating, which we expect to continue while large competitors continue the rapid square footage” expansion, Michael Binetti, a UBS retail analyst, wrote.
Coach trades at the multiples of a mature, slow-growth company, fetching about 14 times trailing earnings and 12 times forward earnings estimates. The comparable multiples for Michael Kors are 44 and 27. Short interest in Coach represented 5.2 percent of the float in January.
Coach now bases its growth story on international sales, particularly in China. But with inventories growing faster than sales in the holiday quarter, some analysts fear markdowns, and the resulting reduced margins, going forward.
“These luxury retailers, we feel like the whole space is over-owned,” Lamensdorf told Canada’s Business News Network in October. “A lot of the stocks are showing distribution. However, if you look deeper, their inventory levels have been rising faster than their growth rates. Inventories for Coach rose almost 15 days during the last quarter.”
PAREXEL International Corporation (NASDAQ:PRXL)
PAREXEL International Corporation (NASDAQ: PRXL) was a 2.7 position on Feb. 4, the fund’s ninth-largest. Shares of the Waltham, Mass.-based bio-pharmaceutical services company, one of the largest contract research organizations in the world, are up nearly 40 percent over the past year. Investors greeted the company’s fiscal second-quarter results warily last week, dropping the stock by 3 percent. It recovered quickly, regaining its previous level by the end of the week.
Analysts worry that profit margins will be compressed by the need to increase employee headcount as the company moves to a strategy of signing major partnership agreements with large clients, including Pfizer Inc. (NYSE:PFE). PAREXEL is now one of two primary CRO providers for the pharma giant. The company added 2,000 employees in fiscal 2012.
“The updated guidance for the second half of fiscal 2013 implies a smaller margin improvement than we had expected, and initial guidance for calendar 2013 implies a larger revenue growth deceleration,” John Kreger, an analyst for William Blair, wrote in a research report.
Prior to the earnings report, Stern Agee reiterated an underperform rating on the stock.
“We believe investors are underpricing the risk inherent in Parexel,” the firm’s analyst wrote. “A much higher customer concentration and insufficient operational benefits accruing to clients from strategic partnerships (based on our industry checks) make PAREXEL a riskier investment than either CVD (Covance Inc.) or CRL (Charles River Laboratories International), in our opinion. Therefore, we use 15x CY14 to arrive at a $27 price target for PRXL; compared to a 10-year average of 18x.”
Morningstar’s Lauren Migliore was more sanguine.
“CROs have a really hard time matching capacity exactly with the demand,” she said. “That’s why you see a good amount of operating leverage either way. But for the most part, we do expect operating margins to expand as these strategic partnerships ramp up.”
Short interest in PAREXEL was 6.9 percent of the float on Jan. 15, according to Yahoo! Finance.
The article Short Candidates for Contrarians, Part 3 originally appeared on Fool.com and is written by D J Krieger.
