After a strong bull run in 2013, it appears that the markets are set to reverse and enter bear territory. Investors can still profit by shorting stocks that are operating in an environment that is detrimental to their business.
Global macro environment is not favorable
The Dow Chemical Company (NYSE:DOW) is seeing greater Q2 headwinds than many had assumed at the beginning of the quarter, due to a global macro environment that is uncertain, especially in Asia. The Dow Chemical Company (NYSE:DOW) faces greater Asia pressure than most of their competitors who are overbuilding several Dow product lines. Europe is also a concern and remains weak, while the improving macro environment we are seeing in the U.S is not enough to make up for the declining international environment.
Weather is a concern
The company highlighted the negative impact cold, wet weather is having on their agricultural sales, such as foregone pre-emergent pesticide use, lower planted acres and some switching of intended corn acres to soy. Investors who believed an aggressive growth forecast needs to re-consider their outlook.
Not the only one affected
Commentary from chemical maker and competitor E I Du Pont De Nemours And Co (NYSE:DD) has been weak as well, further showing that the companies are operating in a negative environment. E I Du Pont De Nemours And Co (NYSE:DD) recently lowered its operating EPS guidance for the first half of 2013 to be about 10% below last year, based on guidance that was provided on April 23. Full year operating earnings are guided to be at the low end of the $3.85-$4.05 per share guidance. Being blamed for the negative conditions was a cool, wet spring, and farmers returning unplanted seeds.
FDA draft huge negative for this pharma company
Allergan, Inc. (NYSE:AGN) shares have seen extreme downside in recent trading days after the FDA released a note discussing steps for generic versions of Allergan’s product Restatis, the company’s treatment for chronic dry eye disease. Generic versions could reach the market within the next 12-24 months. The FDA note gives generics a clear path to the market which goes against Allergan, Inc. (NYSE:AGN)’s expectations and accounts for 20% of Allergan, Inc. (NYSE:AGN)’s earnings. The FDA note is truly surprising, as it was assumed Restatis would operate without competition for years because the FDA would require comparative clinical trials.
Many top tier equity research firms came out with negative outlooks for the company, most notable being Piper Jaffray with a $79 price target based on “a number of generic companies with the sophistication to at least pursue the product, and certainly a path forward without clinical trials makes the opportunity that more attractive.”
Trading at a 10 year low with more room to fall
Barrick Gold Corporation (USA) (NYSE:ABX) is trading at a 10 year low based on declining gold prices, mounting costs and delays at its Pascua-Lama project in South America, not to mention losses at its copper business in Africa. As a result, the company announced that 30% of its corporate staff at their Toronto head office will be let go.
The company also said that their capital spending for this year will be reduced by around half a billion based on a reduced exploration spending. Mining stocks as a whole has been hit hard in the recent weeks based on declining commodity prices for precious metals (especially gold) with no bottom price in site. Spot gold has been trading at multi-year lows that have not been seen since 2011. Gold prices are likely to continue to trade under pressure with the recent strength in the U.S dollar and Treasuries yields stronger.
Final words
Companies such as the ones mentioned are not fundamentally poor, they are just in an unfortunate position that is simply out of their control. As long as the external factors (weather, economy, commodity prices) remain unfavorable, the company’s outlook and stock price will also be unfavorable. When conditions change, investors can consider changing positions and buying shares instead of shorting. I am not optimistic that conditions can turn around any time soon, but as it goes with any short position constant monitoring of the companies and sector is required.
The article Three Stocks To Short originally appeared on Fool.com and is written by Jayson Derrick.
Jayson Derrick has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Jayson is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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