Unfortunately for Corvex and Related, things aren’t working in their favor. Last week, a judge in Maryland denied their request to halt arbitration against CommonWealth that would make it more difficult for investors to get a seat on CommonWealth’s board. Although it appears that value could still be unlocked, CommonWealth’s management team seems hell-bent on making sure Corvex and Related Fund remain on the sidelines and, thus, short-sellers have a very strong case in betting against the company.
The worst company… ever?
In February I declared the potential combination of US Airways Group, Inc. (NYSE:LCC) and American Airlines parent AMR Corporation (PINK:AAMRQ) the worst company ever. A week later the companies announced their intention to merge, and I still stand by this assessment.
My biggest beef with large national carriers is that they aren’t nimble enough to compete with the price-undercutting ability or route flexibility of smaller airlines. For example, Spirit Airlines Incorporated (NASDAQ:SAVE) and Alaska Air Group, Inc. (NYSE:ALK) both have the ability to tweak routes as needed if fuel prices or load factors make it unprofitable to run a route. US Air and AMR won’t have those same luxuries if fuel prices soar or if consumer travel declines.
From a financial perspective, the combined entity is going to be rife with debt, which is going to put it at a distinct disadvantage to smaller carriers like Allegiant Travel Company (NASDAQ:ALGT), which is net cash positive. It could also make it more difficult for national carriers like US Air to make new purchases or lease planes if the opportunity arises.
Finally, history is a terrible precursor of what could be on the way. Not a single national carrier made it through the past 10 years without declaring bankruptcy, and the combination of United Air and Continental to create United Continental Holdings Inc (NYSE:UAL), which was supposed to result in cost synergies, actually resulted in higher expenses last year. You haven’t seen merger-related hiccups until you’ve seen two airlines the size of US Air and AMR trying to merge. Short-sellers, US Air is all yours!
Foolish roundup
No mincing words this week: All three companies have had sizable runs higher, but not a single one looks attractive as a long-term investment due to a mixture of weak organic growth, poor leadership, and a trend of historical underperformance.
What’s your take on these three stocks? Do short-sellers have these stocks pegged, or are they blowing smoke? Share your thoughts in the comments section below.
The article Shorts Are Piling Into These Stocks. Should You Be Worried? originally appeared on Fool.com and is written by Sean Williams.
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 owns shares of Spirit Airlines.
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